EUROPEAN COMMISSION

Strasbourg, 18.4.2023

SWD(2023) 225 final

COMMISSION STAFF WORKING DOCUMENT

IMPACT ASSESSMENT REPORT

Accompanying the

Proposals for a

DIRECTIVE OF THE EUROPEAN PARLIAMENT AND COUNCIL

























amending Directive 2014/59/EU as regards early intervention measures, conditions for resolution and financing of resolution action



















































REGULATION OF THE EUROPEAN PARLIAMENT AND COUNCIL

























amending Regulation (EU) 806/2014 as regards early intervention measures, conditions for resolution and financing of resolution action



















































DIRECTIVE OF THE EUROPEAN PARLIAMENT AND COUNCIL





amending Directive 2014/49/EU as regards the scope of deposit protection, use of deposit guarantee schemes funds, cross-border cooperation, and transparency

{COM(2023) 226-228 final}
{SWD(2023) 226 final}
{SEC(2023) 230 final}

Table of contents

Glossary

1.Introduction: Political and legal context

2.Problem definition

2.1.Problem 1: Insufficient legal certainty and predictability in the management of bank failures

2.2.Problem 2: Ineffective funding options and divergent access to funding conditions in resolution and outside resolution

2.3.Problem 3: Uneven and inconsistent depositor protection and lack of robustness in DGS funding

2.4.How will the problems evolve?

3.Why should the EU act?

3.1.Legal basis

3.2.Subsidiarity: Necessity and added-value of EU action

4.Objectives: What is to be achieved?

4.1.General objectives

4.2.Specific objectives

5.What are the available policy options?

5.1.Approach to design of policy options

5.2.Review of the 2013 Banking Communication on State aid rules

5.3.What is the baseline from which options are assessed?

5.4.Overview of the policy options

5.5.Common elements across the packages of options

5.6.Options discarded at an early stage

6.What are the impacts of the policy options and how do they compare?

6.1.Assessment of policy options

6.2.Comparison and choice of preferred options

6.3.Common elements across the packages of options

7.Preferred option

8.How will actual impacts be monitored and evaluated?

Annex 1: Procedural information

Annex 2: Stakeholder consultation

Annex 3: Who is affected and how?

Annex 4: ‘Zoom-in’ on core elements of the crisis management and deposit insurance framework

Annex 5: Evaluation of the CMDI framework

Annex 6: Overview of deposit insurance issues covered in the impact assessment

Annex 7: Analytical methods

Annex 8: Impact assessment of technical topics that were not exhaustively covered in the main body of the impact assessment

Annex 9: Selected cases of application of the CMDI framework since 2015

Annex 10: Rationale and design features for a common depositor protection in the Banking Union

Annex 11: EBA response to the Call for Advice

Annex 12: Analytical work by the Joint Research Centre

Annex 13: Other quantitative analyses

Annex 14: Options discarded at an early stage

Glossary

Please note: All acronyms and relevant terms used in this impact assessment are explained in this glossary. In order to avoid duplication these are not repeated in the main body. The reader should revert to the glossary when needed.

1.

1.Introduction: Political and legal context

In the aftermath of the global financial and sovereign crises, the EU took multiple decisive actions, in line with international calls for reform 1 , to create a safer financial sector for the EU single market and provide the tools and powers to handle the failure of any bank in an orderly manner, while preserving financial stability, public finances and depositor protection. The Banking Union was created in 2014 based on a blueprint laid out in 2012 2 , relying on a Single rulebook 3 for the EU: a Single Supervisory Mechanism (SSM) and a Single Resolution Mechanism (SRM) equipped with a Single Resolution Fund (SRF) ( Error! Reference source not found. ). In November 2020, the Eurogroup agreed on the creation and early introduction of a common backstop to the SRF by the European Stability Mechanism (ESM) 4 . However, the Banking Union is still incomplete 5 and misses its third pillar: a European Deposit Insurance Scheme (EDIS). The Commission proposal adopted on 24 November 2015 to establish EDIS is still pending.

Figure 1: State of play of the implementation of the Banking Union

Notes: Green = implemented, blue = pending. Implementation of the common backstop 2022-24.

Source: European Commission, Banking Union infographic .

The EU bank crisis management and deposit insurance (CMDI) framework consists of three EU legislative texts adopted in 2014 acting together with relevant national legislation: the Bank Recovery and Resolution Directive (BRRD) , the Single Resolution Mechanism Regulation (SRMR) and the Deposit Guarantee Schemes Directive (DGSD) ). The 2019 Banking package (so-called “risk reduction package”) included measures delivering on Europe's commitments made in international fora 6 to take further steps towards completing the Banking Union by providing credible risk reduction measures to mitigate threats to financial stability, as published in the European Commission’s 2015 Communication 7 .

The objectives of the CMDI framework

The CMDI framework was designed to avert and manage the failure of credit institutions of any size, while protecting financial stability, depositors (households and businesses) and aiming to avoid the risk of excessive use of taxpayer money (see Annex 4 for a description of the fundamental elements of the CMDI framework).

The CMDI framework provides for a set of instruments that can be applied in the different stages of the lifecycle of banks in distress: early intervention measures, measures to prevent the failure of a bank, a resolution toolbox when the bank is declared failing or likely to fail (FOLF) and it is deemed that the resolution of the bank (rather than its liquidation) is in the public interest in order to avoid financial instability. Conversely, national insolvency proceedings, which are outside of the CMDI 8 framework, continue to apply for those failing banks, where insolvency proceedings are deemed more suitable than resolution without harming public interest or endangering financial stability. 

The CMDI framework is intended to provide a combination of funding sources to manage failures in an economically efficient manner, protecting financial stability and depositors, maintaining market discipline, while reducing recourse to the public budget and ultimately the cost to the taxpayers. The cost of resolving the bank is first covered through the bank’s own resources, i.e. losses are allocated to the shareholders and creditors of the bank (constituting the bank’s internal loss absorbing capacity), which also reduces moral hazard and enhances market discipline. If needed, these resources can be complemented by funds from deposit guarantee schemes (DGS) and resolution financing arrangements funded by the industry (national resolution funds (RF) or a Single Resolution Fund (SRF) in the Banking Union). These funds are built through contributions by all banks irrespective of their size and business model. In the Banking Union, these rules were further integrated by entrusting the Single Resolution Board (SRB) with the management and oversight of the SRF, which is funded by contributions from the industry in the participating Member States of the Banking Union. Depending on the tool applied to a bank in distress (e.g. preventive, precautionary, resolution or alternative measures under national insolvency proceedings) and the specificities of the case, State aid 9 control may be necessary for interventions by a RF, a DGS or public funding from the State budget.

The CMDI framework also fosters depositor confidence by requiring that deposits are protected up to EUR 100 000 per depositor and per bank, regardless of whether the bank is put into resolution or liquidation under national insolvency proceedings. In insolvency under national proceedings 10 , the primary function of a DGS is to payout covered depositors within seven days of a determination of unavailability of their deposits. Under the DGSD, DGSs may also have other functions. The latter are aimed at preserving depositor confidence, provided they are less costly than a payout of covered deposits in insolvency, such as: financing preventive measures, contributing financially to the resolution of a bank or, in insolvency, financing measures other than payout, i.e. a transfer of assets and liabilities to a buyer, to preserve the access to covered deposits.

A resolution framework to overcome the shortcomings of insolvency proceedings

National insolvency proceedings are not always suited to handle bank failures because banks cannot be liquidated like any other corporate business due to their unique vulnerability to deposit/bank runs, their impact on financial stability and their role in the functioning of the economy through financial intermediation (deposit-taking, provision of credit), monetary policy transmission and their role in the payment system. In view of these elements, any bank failure as opposed to ordinary corporate failures (see references in Box 6 in Annex 4) is more likely to give rise to public policy concerns, which would often lead to bail-out actions to limit the fallout of piecemeal liquidation. Resolution offers an alternative to disorderly insolvency, where there is a public interest in resolving a bank, instead of using existing insolvency proceedings. The introduction of the resolution framework, in line with the international key attributes for effective resolution regimes published by the Financial Stability Board in the aftermath of the global financial crisis 11 , aimed to fill an important gap in the management of banking crises, reducing risks for financial stability, depositors and taxpayers.

The resolution framework brings a number of very important benefits. Contrary to liquidation under normal insolvency proceedings, resolution increases the efficiency in handling bank failures in terms of costs, by preserving the franchise value of bank’s assets and the client relationship through restructuring/ sale of business to a buyer and avoiding cutting access of the bank’s customers to their client accounts and loans (i.e. individuals/households, small and medium enterprises (SMEs), corporates, public institutions, other financial institutions which may include other banks, insurance companies, other industry players). This way, it avoids any public perception of discontinuity in the operations of the bank, thereby stemming the propagation of adverse effects on broader confidence and financial stability. Resolution also better redistributes costs by shifting away losses from taxpayers to the failing bank’s shareholders and creditors and the industry overall, where industry-funded safety nets are used. It also fosters consumer confidence in the banking sector by significantly reducing the risk of spiralling contagion to other banks and mitigating the risks that bank clients may start questioning the solidity of the system and its safety nets as it could happen under insolvency proceedings.

Another merit of the resolution framework is providing predictability and level playing field when handling failing banks and enhancing preparedness (recovery and resolution planning) for crisis times, including by imposing requirements on banks to absorb possible losses internally or via the safety nets. Lastly, resolution may lower the impact of a bank’s failure on DGS financial means in a liquidation under normal insolvency proceedings, which requires the DGS to payout all covered deposits (up to EUR 100 000) and bears a high risk of depleting the national DGS funds. Notwithstanding its overall benefit, another downside of the payout of covered deposits is that it can be disruptive to depositor confidence because of its impact on uncovered deposits (leaving uncovered deposits above EUR 100 000 to take losses). All these benefits of resolution strengthen financial stability, preserve value, reduce moral hazard and the risk of inflicting the cost of failure on citizens.

A resolution framework applicable to any bank

In terms of scope of application, the determination of the resolution or liquidation strategy is not automatically driven by bank size or structure of banking sectors but, instead, is made by the resolution authority on the basis of the public interest assessment on a case-by-case basis. From its inception in 2014 and rooted in the international experience of dealing with bank crises over decades, the resolution framework was created with the intention to cater for the orderly management of any bank failure, irrespective of its geographical footprint (i.e. domestic or operating across borders), its size or business model, when this best serves the objectives. Of course, resolution is widely expected by all stakeholders to be the only credible option to manage the failure of large systemic banks, because it provides a clear set of tools and adequate funding (in the form of high buffers of own funds and eligible liabilities to absorb losses through bail-in, and commensurate access to resolution funds) to avoid further contagion to the real economy or financial markets.

However, as recital 29 of the existing BRRD points out, it is crucial, in order to maintain financial stability, that resolution authorities have the possibility to resolve any bank due to their critical functions or potential systemic nature. While the idiosyncratic failures of large banks tend to be more disruptive to the financial system than failures of small banks, this is justified by the risks to financial stability (especially in the case of concomitant failures of several small/mid-sized banks during times of crisis), the destruction of economic value locally/regionally or the disruption of depositors confidence in particular for small jurisdictions (see Box 6 in Annex 4 for references regarding the impact of failing small/mid-sized banks on financial stability). For similar reasons, all banks contributing to the safety nets should be able to benefit from them, if the conditionality to access these safety nets is fulfilled. 

In practice, except for the 120 banks under direct SRB remit 12 , national authorities remain responsible for the application of the resolution framework and the discretionary choice between using a resolution or a liquidation strategy to manage a failing bank. The public interest assessment takes into account considerations that go beyond the size of the bank, such as its functions that are critical for the broader economy (e.g. deposit taking, lending, payments) and their substitutability, interconnectedness to other actors in the financial system, risk profile, nature of activity, which are important when assessing the impact of a bank failure on financial stability. For these reasons, it is necessary to ensure a coherent application of the framework, which has not been the case until now.

Insolvency proceedings remain available for those banks, where no contagion risks or other significant risks to financial stability exist and where there are no critical functions, provided that the authorities assess that these banks are not in the public interest.

The test of time and the need for a reform

Notwithstanding the progress achieved since 2014, the application of resolution has been scarce, especially in the Banking Union and areas for further strengthening and adjustment were identified with regard to the CMDI framework in terms of design, implementation and most importantly, incentives for its application. These issues concern in particular the category of small and medium-sized banks that are often “too big to liquidate” under normal insolvency regimes.

To date, and as shown in Chapter 2, Annex 5 (evaluation) and evidenced in Annex 9, most failing small and mid-sized banks were managed under national regimes often involving the use of taxpayer money (bailouts) instead of the required bank’s internal resources (bail-in) 13 . This goes against the intention of the framework as set up after the global financial crisis, which involved a major paradigm shift from bail-out to bail-in (required amount of burden sharing) and industry-funded safety nets, such as the SRF in the Banking Union, so far unused in resolution. In this context, the opportunity cost of the resolution funds financed by all banks is considerable.

The resolution framework underperformed with respect to key overarching objectives, notably facilitating the functioning of the EU single market in banking by ensuring level playing field, handling cross-border and domestic crises and minimising recourse to taxpayer money.

The reasons are mainly due to misaligned incentives in choosing the right tool to manage failing banks, leading to the non-application of the harmonised resolution framework, in favour of other avenues. This is overall due to the broad discretion in the public interest assessment, difficulties in accessing funding in resolution without imposing losses on depositors and easier access to funding outside of resolution, raising risks of fragmentation and suboptimal outcomes in managing banks’ failures, in particular of those smaller and mid-sized banks that are often too big to liquidate under normal insolvency regimes.

The review of the CMDI framework (BRRD/SRMR/DGSD) and the interaction with national insolvency proceedings should provide solutions to address these issues and enable the framework to fully achieve its objectives 14 and be fit for its purpose for all banks in the EU irrespective of their size, business model and liability structure, if required by prevailing circumstances. The revision should aim at ensuring a coherent application of the rules across Member States, delivering level playing field, while protecting financial stability and depositors, containing contagion and reducing recourse to taxpayer money. In particular, the CMDI framework could be improved to facilitate the resolution of small and medium-sized banks as initially expected, by mitigating the impacts on financial stability and the real economy without recourse to public funding, but also fostering confidence of their depositors that consist primarily of households and SMEs 15 . 

The objectives of the reform would bring the EU framework closer to the frameworks of international peers, especially the United States (US). The extensive experience and excellent track record of the US Federal Deposit Insurance Corporation, spanning over many decades, where failing smaller and mid-sized banks are routinely transferred to a buyer with the support of a common fund financed by the contributions of the industry, can reveal how some features of the CMDI framework could be improved (see Annex 8, section 11) 16 .

The CMDI reform and the broader implications for the Banking Union

Together with the CMDI reform, a complete Banking Union, including its third pillar, EDIS, would offer a higher level of financial protection to Europe’s households and businesses, foster trust and strengthen financial stability as necessary conditions for growth, prosperity and resilience in the Economic and Monetary Union and, more generally, in Europe. The Capital Markets Union complements the Banking Union as both initiatives would help finance the twin transition (digital and green), enhance the international role of the euro and strengthen Europe’s open strategic autonomy in a changing world, particularly considering the current challenging economic and geopolitical environment. 

On the one hand, European banks have proven robust so far, including in terms of capital adequacy and liquidity buffers. Moreover, the reforms undertaken to implement the first pillars of the Banking Union in the aftermath of the 2008 global financial crisis have helped in strengthening the position of European banks. Any fallout was managed with the available toolkit (either provided by the CMDI framework such as moratoria, resolution tools, or tools under national insolvency frameworks) even when the circumstances of the failure were particularly unusual 17 .

On the other hand, the profitability and cost-efficiency of European banks is arguably structurally weak and asset quality concerns may resurface amid increased credit risk fuelled by the deterioration in the macroeconomic outlook and the energy crisis triggered by geopolitical tensions. 

Therefore, more adverse conditions are possible in the future, making the need to proceed with the current reform of the CMDI framework, improve its use and to step-up the efforts for the completion of the Banking Union more pressing and compelling. Under the status quo, a large proportion of failing banks would continue to be restructured or liquidated outside the harmonised resolution framework, under existing heterogeneous national regimes, where in some cases only disorderly and costly insolvency proceedings or solutions involving taxpayer money exist. This would weaken consumer confidence in the EU banking sector and the predictability and level playing field of our single market for banking, and of the Banking Union in particular.

In June 2022, the Eurogroup was not able to reach a political agreement on a comprehensive work plan to complete the Banking Union 18 . Instead, the Eurogroup invited the Commission to table legislative proposals for reforming the EU framework for bank crisis management and national deposit insurance. This was one of four workstreams discussed in the context of the Banking Union completion workplan (in addition to EDIS, the regulatory treatment of exposures to sovereigns and enhanced cross-border market integration). The other workstreams have been put on hold until the next institutional cycle.

In parallel, the European Parliament also stressed in its 2021 annual report on the Banking Union, the importance of completing it with the establishment of an EDIS and supported the Commission in putting forward a legislative proposal on the CMDI review.

This impact assessment covers the analysis of policy measures for the review of the CMDI framework. While EDIS was not explicitly endorsed by the Eurogroup, it would have made the CMDI reform more robust and delivered synergies and efficiency gains for the industry. Some of these elements are included in this impact assessment for technical completeness and illustration of the internal consistency among the elements of a robust framework, also reflecting technical discussions which took place on EDIS in the past years in expert groups, Council working parties and inter-governmental fora.

Such a legislative package would be part of the agenda for the completion of the Banking Union, as emphasised in President von der Leyen’s Political Guidelines , which also included the implementation of EDIS. 

This impact assessment report reflects analyses based on information and data up until 31 January 2023 and does not include references to subsequent developments.

2.Problem definition

This section outlines the problems identified in the evaluation of the current framework. It explains how the problems have been identified, what their drivers are, and why action is necessary. More details are available in the evaluation in Annex 5, including an assessment of the CMDI functioning against various criteria.

The most relevant evidence underpinning the analysis of problems and their drivers in this chapter includes, among others: analysis of past cases of bank failures, quantitative analysis illustrating banks’ difficulty to access safety net funding, the divergent approaches to the public interest assessment, the issues with the creditor hierarchy, divergences between failing or likely to fail and insolvency triggers or the shortcomings regarding early intervention measures. These are complemented by references to external analyses pointing to the lack of clarity regarding the least cost test for DGS uses and the inability of DGS funds to intervene in resolution (EBA opinions), other assessments of business model specificity of small and mid-sized banks (ECB) and DGS funds robustness (Joint Research Centre). This evidence is referenced throughout the impact assessment and in the relevant annexes. A complementary, more exhaustive summary of the evidence used in the impact assessment is also provided in Annex 1, sections 3 and 4.

Main considerations related to the limited use of resolution and why it is a problem

The evaluation of the current rules shows that the introduction of the CMDI framework in 2014 brought important benefits in terms of maintaining financial stability, significantly improving depositor protection and contributing to boosting consumer confidence in the EU banking sector (illustrated by a reduction in bank runs and an overall increase in depositing money in banks). However, its practical application failed to achieve some important objectives or achieved them only partially, namely, simultaneously, protecting taxpayer money and depositors, while ensuring level playing field and a fair treatment of creditors across the EU single market (see Annex 5).

In particular, recent experiences show that the resolution framework is not entirely fit to handle the failure of small and medium-sized banks, whose business model, predominantly funded with deposits, may affect authorities’ incentives to use the resolution framework as initially intended. This problem is particularly relevant when external funding (e.g. RF/SRF) is necessary to support the failure of the bank, for instance to facilitate a sale to a buyer, and when this access to funding is not possible within the resolution framework without imposing losses on deposits. Managing these bank failures outside resolution is not a problem per se. However, the concern is that these choices were driven by the difficulty to access appropriate funding in resolution (despite its availability), while on the contrary, other avenues entailed a recourse to public funding to avoid disorderly failure.

The evidence in this chapter as well as in Annex 5 (evaluation) and Annex 9 (list of past cases) shows that, most failing small and mid-sized banks were managed under national regimes (preventive and alternative measures in insolvency) often involving the use of taxpayer money (bailouts, sometimes by local public authorities), instead of the industry-funded safety nets, such as the SRF in the Banking Union, which will amount to approximately EUR 80 billion by 2024. In total, more than EUR 58 bn were provided by national or regional governments to bail-out banks (as shown in Chapter 2, section 2.2) since 2015, when the resolution framework started to apply. More than 60% of banks in distress in the EU were managed outside of the resolution framework. For banks within the Banking Union, this number exceeds 70%. When considering only cases from 2016 onwards, when the bail-in tool started to apply, the proportion of measures other than resolution rises to 75% of the cases for the EU and to 84% for the Banking Union (Chapter 2, section 2.1).

The scarce application of resolution, and the preference by resolution authorities to look for alternative avenues often with the support of public money, are mainly due to the misalignment of incentives to choose the appropriate tool to address a bank failure.

Major concerns have been raised about imposing losses on depositors, such as households and owners of small businesses in a region and the impact this would have on financial stability, depositor protection, thereby creating incentives to find alternative solutions (see Box 1  below, Annex 8, section 1 and Annex 4, Box 6). The prevalence of deposits in the liability structure of these banks increases the likelihood of imposing losses on depositors to comply with the conditions to access RF/SRF when the resolution avenue is chosen. Many stakeholders (Member States, citizens/depositors) consider that imposing losses on depositors, beyond the protection of EUR 100 000 granted by the DGS, would have financial stability implications which may fuel concerns on the protection of deposits in the system as a whole. It may lead to bank runs and increase the risk of contagion to other institutions. Resolution authorities have therefore been reluctant to use measures, such as the bail-in tool in resolution that aims to absorb losses through the bank’s shareholders and creditors, when it would lead to imposing losses on depositors (such as households and SMEs). This may particularly be the case for small and mid-sized banks that are anchored in the local/regional economy and where the bail-in of depositors could inflict substantial damage to the (local) real economy. Faced with a trade-off between preserving financial stability and limiting the impact on the real economy on one hand, and using taxpayer money on the other hand, authorities (European, national or regional) may therefore have delayed the start of the crisis management procedures in search of alternatives causing the financial situation of the bank in distress to further deteriorate. The choice of such alternatives often resulted in preferring certain objectives (protecting financial stability and depositor protection) over others (avoiding the use of public funds and level playing field and fair treatment of depositors and taxpayers in the single market). This shows that, for certain small and mid-sized banks, the CMDI framework cannot simultaneously fulfil all the four objectives agreed by co-legislators in the framework at its inception in 2014, and which are in line with the international consensus on the attributes of effective resolution regimes. Resolution authorities were faced with choosing which objectives to protect – financial stability and depositors over public budgets and level playing field, leading to a sub-optimal performance of the framework and risks to its credibility. Therefore, the CMDI framework needs to be amended to avoid such trade-offs in the future and facilitate the simultaneous achievement of the objectives of protecting financial stability, depositors as well as taxpayer money and level playing field for all banks.

The evaluation shows that the misalignment of incentives when deciding which tools to apply to a failing bank can be explained by several drivers ranging from the flexibility and room for arbitrage that exist when choosing the right tools, the divergences in conditions to access financing by the safety nets (DGS, RF/SRF) or benefit from public support and the resulting vulnerabilities of the depositor protection in the EU.

These drivers directly affect the predictability of the framework, creating inefficiencies in the management of bank failures. On this basis, the framework does not appear adequate to handle the failure of certain institutions in respect of all the objectives, be it on an idiosyncratic basis or under a systemic scenario with multiple bank failures, where these problems would be exacerbated.

The problem tree

Figure 3 displays the problem tree, covering the three main high-level problems identified as well as the problem drivers and their related consequences.

Figure 3: The problem tree 19

Source: Commission services

The first problem groups together all issues related to the current lack of legal certainty and predictability in the application of the framework. Most importantly, the decision of public authorities whether to resort to resolution or insolvency tools for failing banks may differ considerably depending on the solutions available for a specific failing bank in the national framework. The second problem focuses on unresolved funding issues (sources, access conditions) and is central to the application of the framework 20 . The third problem highlights the need to improve depositor protection, including the potential lack of sufficient resources in case several banks in a Member State were to fail.

The persistence of these problems suggests that the CMDI framework in its current form is unable to ensure adequate and proportionate solutions for all bank failure regardless of the size and business model, while preserving overall consistency of outcomes and a level playing-field, aligning incentives and limiting risks to financial stability, moral hazard, and exposure of taxpayer funds. Also, the problems related to depositor protection and handling of the failure outside the harmonised framework impair the functioning of the single market and affect depositor confidence, which could lead to bank runs and undermine financial stability.

2.1.Problem 1: Insufficient legal certainty and predictability in the management of bank failures

The resolution framework introduced strategies, powers and tools to restructure failing banks while protecting depositors, financial stability and taxpayers. However, so far resolution has only been scarcely applied, in particular in the Banking Union under the SRMR. Instead, other tools have been more frequently used such as insolvency proceedings involving DGS funds, precautionary recapitalisation or measures to prevent the failure and the exit of the bank from the market altogether. These measures often involved the use of taxpayer money (bail-outs), instead of the bank’s internal resources (bail-in) to the extent required by the resolution framework 21 and industry-funded safety nets, such as the Single Resolution Fund (SRF) in the Banking Union (EUR 80 bn by 2024), so far unused. Since 2015, more than 60% of banks in distress in the EU were managed outside of the resolution framework. For banks within the Banking Union, this number increases to more than 70%. When considering only cases from 2016 onwards, when the SRMR and the bail-in tool started to apply, the proportion of tools other than resolution rises to 75% of the cases for the EU and to 84% for the Banking Union. Error! Reference source not found. depicts the tools applied in past cases of banks in distress in the EU from 2015 to date. For a complete list of cases, please see Annex 9. It is worth noting that a number of these cases dealt with “legacy issues” which occurred since the start of the financial crisis in 2008 or before 22 .

Figure 4: Variety of tools applied in bank crises cases from 2015 to date in the EU (as a percentage of all cases and absolute number)

Notes: Banks that received different support measures throughout the time are counted for every tool applied. Out of the 13 FOLF banks that went into resolution (positive public interest assessment), seven were Banking Union cases (out of which four occurred before the entry into force of the minimum 8% TLOF bail-in requirement and before the SRB became responsible for the handling of these cases). In ten out of those 13 cases national resolution funds were used. Beyond these 13 cases, most other cases of support measures encountered (18 out of 20 cases) were Banking Union cases.

Source: European Commission

Although certain aspects of the framework are still in a transitional period 23 and despite the variety of tools to manage failing banks or to intervene before failure, its scarce application can be linked to the conditions to activate such measures that vary substantially across Member States, are subject to discretion and sometimes lack clarity or leave room for arbitrage, increasing legal uncertainty, uneven protection of depositors, ineffective and inefficient use of funds available.

In particular, a number of problem drivers emerge: (i) lack of clarity and adequate framing of the application of DGSD preventive measures and BRRD precautionary measures, (ii) broad legal discretion in the application of the public interest assessment to place a bank in resolution (under the EU framework) versus insolvency (under national rules) and (iii) divergence in the hierarchy of claims in national insolvency laws 24 .

The variety of tools allowed are preserving a margin of manoeuvre to account for legacy situations 25 . This ensures that the framework remains flexible and proportionate to address various types of bank failures. At the same time, the divergences mentioned above create a risk of inconsistent solutions across Member States and reduce the predictability of the framework. Moreover, the possibility to use public budgets (i.e. taxpayers’ funds) outside resolution, which in principle should be avoided or strictly limited to avoid risks of moral hazard, begs the question whether the framework could better achieve its objectives. This would promote a more consistent approach to the management of bank failures, including in terms of increased level playing field at EU level.

2.1.1.Lack of clarity and framing of the BRRD precautionary measures and the DGSD preventive measures

The current set of DGSD rules provides for measures to support a bank before it faces serious deterioration in its financial situation and the triggering of resolution or insolvency, the so-called preventive measures.

Currently, Article 11(3) DGSD enables the use of DGS funds for preventive measures as a national option and discretion (OND). Not all Member States have transposed it into national law 26 .

These measures to prevent the failure of a bank are subject to conditions ensuring their sufficient soundness from a financial perspective, and that the DGS resources are not used excessively. The safeguards 27 should also ensure the correct interaction with the FOLF determination. However, the current legislative text provides insufficient clarity on such conditions and safeguards 28 . In past interventions, DGSs granted support to banks which were rather close to a situation of failure implying an inefficient use of DGS funds or a circumvention of resolution/liquidation. While the current rules do not prevent this, there is scope to reflect on possible improvements in the legislative framework to reinforce the role of these measures as preventive actions, which should, in principle, intervene when a bank’s financial conditions deteriorate but still far from a failure.

Moreover, the DGS intervention could be qualified as either private or public for the purpose of State aid control by the Commission. Such an assessment is made on a case-by-case basis, taking into consideration elements such as the governance and decision-making procedure of the DGS and circumstances relating to the measure. The determination whether a DGS intervention constitutes State aid or not, has an impact on the legal treatment of the DGS intervention, under the BRRD. In particular, the qualification of the intervention as State aid would de facto impede the intervention of the DGS in a preventive capacity, as this would trigger a determination of FOLF under the BRRD, i.e. the bank would have to be resolved or put into insolvency. Evidence shows that some preventive measures were assessed as being private (i.e. EUR 5.35 bn funded by the private arm of a DGS fund or through market conform measures) and therefore neither qualified as State aid (see section 3.2.13 of Annex 6 and Annex 9) nor triggered FOLF under BRRD.

The BRRD further provides for a set of precautionary measures 29 (in the form of recapitalisation or guarantees/liquidity) which can be granted to solvent banks to address hypothetical financial issues identified in a stress test or equivalent exercise. BRRD provides for strict conditions and safeguards to grant support in this form, to ensure that the support does not benefit a bank that is too close to failure and to avoid (for precautionary recapitalisation) that the support is used to cover losses that were already incurred by the bank or are likely to be incurred.

Past practice in the application of these measures has provided the opportunity for the Commission to identify issues which may require an interpretative effort and hence would require legal clarification, particularly with respect to the concept of solvency, the determination of the amount of support allowed (by virtue of distinguishing between incurred, likely and unlikely losses) as well as to the additional clarity needed as to the use of precautionary recapitalisation to support impaired asset measures (see section 7.1.3.3 in Annex 5 (evaluation) and section 9 in Annex 8 for more information on the legal clarity issues identified for precautionary measures).

Improving the clarity of the legal provisions would help limit the risk that support for preventive and precautionary measures would allow existing creditors to exit their claims on the bank shortly before FOLF is triggered and resolution/insolvency is applied, which may in turn result in a higher use of financing sources (RF/SRF in resolution or DGS funds under insolvency proceedings).

2.1.2.Discretionary application of the public interest assessment

As highlighted in the evaluation (see Annex 5, section 7.1.3.4), the BRRD and SRMR leave a margin of discretion to resolution authorities when carrying out the public interest assessment (PIA). While a certain degree of flexibility when assessing the different factors relevant for the PIA is needed, the divergent applications and interpretations may not fully reflect the logic and intention of the legislation. In the Banking Union, the test was so far applied rather restrictively and resolution action was taken only on three occasions 30 . Resolution was used more frequently outside the Banking Union and in some Banking Union Member States when it took place under the direct governance of national resolution authorities (ten out of 13 cases) 31 .

In essence, the PIA compares resolution and the normal insolvency proceedings available at national level against a set of objectives which include (i) the impact on financial stability (a wide-spread crisis may yield a different PIA than an idiosyncratic failure), (ii) the assessment of the impact on the bank’s critical functions and (iii) limiting the use of extraordinary public financial support 32 .

Regarding the notion of critical function, there are divergences in interpretation among resolution authorities on whether the impact of its interruption should be assessed for the economy of an entire Member State or at local/regional level. However, the BRRD and SRMR (particularly if read in conjunction with the relevant delegated act) 33 are not meant to exclude the impacts within a Member State (i.e. in a region/locally) or to restrict the assessment of the financial stability to (at least) an entire Member State.

Moreover, with the objective of an efficient use of external sources of funding in mind, the requirement to compare the use of funding in resolution and in insolvency could be clarified as this would help deliver a broader choice of resolution tools which are often more cost-effective compared to insolvency. In particular, when resolution provides a possibility to use DGS resources more effectively and efficiently than in insolvency (for example because it would be cheaper for the DGS to contribute to resolution than to insolvency, where the only possible use of a DGS would be to pay out covered depositors), this element should provide additional grounds for a positive PIA finding via the application of the framework. Furthermore, the objective to limit the cost for taxpayers could benefit from a further distinction between the use of public funds from the State budget and the use of the RF/SRF or the DGS, which are financed by all banks.

2.1.3.Divergence in the hierarchy of claims in national insolvency laws

The BRRD harmonised at EU level certain rules concerning the order according to which creditors must be repaid (hierarchy of claims) in national laws governing bank insolvency proceedings, especially regarding covered deposits, preferred non-covered deposits 34 and subordinated classes of instruments. However, certain divergences in the hierarchy of claims remain, in particular, when it comes to the ranking of ordinary unsecured claims, other deposits and exclusions from bail-in. This creates the potential for uneven treatment of creditors, including depositors, in resolution and in insolvency, across Member States. Such divergences have the potential to create an uneven playing field in the single market and complicate the no creditor worse off (NCWO) assessment, which ensures that creditors are not worse off in resolution than under insolvency proceedings, especially for cross-border groups including across Member States participating in the Banking Union 35 .

More precisely, the NCWO principle imposes that the allocation of losses to shareholders and creditors under the resolution scenario should not exceed the losses that those shareholders and creditors would otherwise have incurred under a normal insolvency proceeding, which would be counterfactual. If it does, those shareholders/creditors should be compensated. Hence, when applying resolution tools, the outcome of the NCWO assessment together with the identification of the relevant counterfactual, depending on the specific national insolvency regime, can lead to varying conclusions in terms of treatment of creditors across Member States, which is especially relevant as it could create difficulties and creditors’ unequal treatment in cases of cross-border group resolution.

2.2.Problem 2: Ineffective funding options and divergent access to funding conditions in resolution and outside resolution

The evaluation of the framework identified a second problem, i.e. the divergent conditions for accessing funding in resolution and outside resolution. When funding from the safety nets (RF/SRF and DGS) is used to complement the bank’s internal loss absorbing capacity, the requirements to access such funding are very different (i.e. the least cost test to access the DGS fund in and outside resolution as well as the minimum 8% bail-in rule to access the RF/SRF are very divergent and impact creditors, including deposits differently). More specifically, funding outside resolution is generally more easily accessible than in resolution, in particular for certain banks, as explained more in detail in section 2.Error! Reference source not found. 36 . Funding issues are driven by (i) structural difficulties in fulfilling the minimum conditions to access the RF/SRF by certain banks 37 , (ii) divergent requirements to access funding from the resolution fund as compared to other sources of funding outside resolution, and (iii) the lack of clear, adequate and consistent rules in accessing DGS funding in resolution and insolvency. Based on available information, there are indications that this second problem led to the use of public money in crisis management 38 .

2.2.1.Difficulty in fulfilling the conditions to access resolution funds for certain banks

To facilitate the execution of resolution strategies and the application of resolution tools 39 , banks are required to hold sufficient loss-absorbing capacity composed of own funds and eligible liabilities (MREL). More specifically, they are required to hold a sufficient and proportionate amount of liabilities, which are easily bail-inable. The resolution authority determines the MREL requirement on a bank-by-bank basis depending on the chosen resolution strategy and envisaged resolution tools. For instance, in the case of open bank bail-in, the MREL requirement is calibrated to ensure that bank is able to bear the losses and, to get recapitalised and restructured so it can continue its activity. Resolution authorities may provide complementary financing support, if needed, through the use of the RF/SRF, provided that certain conditions are met. Among these, key conditions to access the RF/SRF for solvency support are: imposing losses on shareholders and creditors for not less than 8% of total liabilities including own funds (TLOF) and a limitation on the contribution from the fund, which cannot exceed 5% TLOF 40 per bank. While not clearly mentioned in the legal text and remaining subject to legal interpretation, it is considered that accessing the RF/SRF for liquidity support does not require a minimum bail-in of 8% TLOF.

As developed in the evaluation in Annex 5, the need to access resolution funding may arise for any bank (whether executing an open bank bail-in or a transfer as resolution strategy) and the conditions to access the RF/SRF under the current framework do not sufficiently account for distinctions on grounds of proportionality based on the resolution strategy, size and/or business model. The ability of banks to fulfil the access conditions to the RF/SRF depends therefore only on the stock and the type of bail-inable instruments available in their balance sheets at the time of the intervention, while it should be based on a case-by-case assessment of the bank and the resolution strategy.

Overall, banks have considerably increased their MREL capacity and, by 2024, they will be expected to comply with the requirements set in BRRD II. The build-up of MREL is gradual and a necessary transition to address the legacy risks. However, evidence (see analyses in Annexes 7 and 13) suggests that, for some (smaller) banks in certain markets, the difficulty to build up MREL is of a structural rather than of a transitional nature 41 . Analyses underpinning this conclusion focused on: (i) the structure of banks’ liabilities, in particular assessing the amount of liabilities that are bail-inable and whether deposits would need to be subject to bail-in in order for the bank to be able to reach the 8% TLOF and access the RF/SRF 42 (ii) the level of MREL shortfalls and (iii) market information on issuances by certain smaller/medium-sized banks 43 . For some banks, considering their specific liability structure, certain deposits 44 would need to be bailed-in in order to access the RF/SRF, which may raise concerns of financial stability and operational feasibility considering the economic and social impact in a number of Member States. This is particularly the case, for example, where banks are relying significantly on deposit funding and where bail-in may have a profound impact on certain portions of the real economy.

According to the empirical evidence presented in Annex 7 (section 3.2.1), out of a sample of 187 banks that would go into resolution if they failed as of Q4 2019, deposits in 44 banks in 18 Member States would have to bear losses for an aggregate amount of EUR 14.16 bn under the baseline scenario (status quo) in order to reach 8% TLOF and be able to access the RF/SRF. As explained in section 8 of Annex 8, retail and SME deposits are predominant in smaller and medium-sized banks across the EU. Such considerations may explain the reluctance of some resolution authorities to impose losses on depositors, leading to sub-optimal crisis management choices outside resolution financed by public budgets.

2.2.2.Divergent access requirements for the resolution fund and for funding outside resolution

Precautionary measures, preventive measures and liquidation aid under national insolvency proceedings are different forms of public support available outside resolution. In past cases, these measures have been used quite extensively (see Annex 9).

Following the entry into force of the resolution framework in 2015, available evidence shows that European banks benefitted from public support amounting to over EUR 58.2 bn mainly under insolvency proceedings and in the form of precautionary aid measures 45 , in addition to the burden sharing required by the State aid rules (Figure 5).

All these measures are subject to burden sharing requirements 46 pursuant to State aid rules, requiring that, after losses are first absorbed by equity, contributions by hybrid capital holders and subordinated debt holders may be necessary. This requirement is generally less demanding for bank debt holders than the corresponding requirements under BRRD, which entails that losses are absorbed by shareholders and creditors, potentially including depositors (e.g. through bail-in) for a minimum of 8% TLOF before the resolution fund can be accessed.

Figure 5: Sources of complementary external funding in crisis, cases between 2015 and 2022 (in EUR bn)

Notes: The contribution from the RFs amounting to EUR 6.9 bn, includes the amount of EUR 1.4 bn contributed jointly by the Polish RF and DGS in the case of resolution of Getin Noble bank SA (see Annex 9 for more details on this case). Information on the amounts contributed by RFs and DGSs in some of the bank cases are not publicly available.

Source: European Commission calculations

In the case of preventive and precautionary aid (such as precautionary recapitalisation or preventive measures), the framework provides for specific conditions to be met to ensure that these are granted to banks which are in financial difficulties but are still solvent and not failing. These conditions are well intended to ensure consistency with the overall logic of the resolution framework and to avoid that the burden sharing rules under State aid, in cases where they lead to a lower requirement create an opportunity to resort to these measures to “escape” the more demanding bail-in requirement under BRRD.

However, as mentioned in section 2.1.1, some banks were declared FOLF shortly after receiving precautionary support on grounds, inter alia, of being solvent as confirmed by the competent supervisor.

Liquidation aid in national insolvency proceedings can also be useful to provide financial support to banks to the extent necessary to ensure their orderly exit from the market. However, the issue observed is that the availability of such support under different and generally more advantageous conditions from the point of view of the bank’s creditors 47 may create room for arbitrage and incentivise resolution authorities to look for solutions outside the resolution framework, particularly in light of the discretionary nature of the PIA 48 . This effect is exacerbated by the fact that, resolution authorities, when applying the PIA, rarely compare the need for external funding in resolution (through the resolution fund or DGS) and in insolvency (liquidation aid), leading to the choice of inefficient tools to manage the bank’s failure.

2.2.3.Limited scope to grant DGS funding in resolution and insolvency

Under the current framework, DGS funds can be used to finance some interventions both in resolution and in insolvency. Article 109 BRRD provides for the use of DGS funding in resolution, in addition to the resolution fund. The provision sets out several conditions for the DGS intervention. The DGS support in resolution is limited to an amount equal to the losses borne by covered deposits if they were exposed to bail-in or if they could bear losses under another resolution strategy. In addition, the DGS’s liability is limited to the amount of losses that the DGS would have borne when paying out covered deposits under an insolvency counterfactual (least cost test). The combination of these rules, coupled with the limitations posed by the super-preference for the DGS in the ranking of liabilities in insolvency (which entail that in most cases DGS would not be exposed to losses in the counterfactual insolvency 49 ) makes the use of DGS in resolution more costly, creating several issues in applying the framework concerning the use of DGS in resolution. The DGS can only provide an amount up to the losses it would bear in case of a hypothetical payout in insolvency. These losses are given by the difference between the amount disbursed by the DGS in case of a payout and the amount the DGS would recover from the sale of the bank’s assets in insolvency. Given the very high ranking of the DGS in the hierarchy of claim (super-preference of DGS claims), the DGS has the possibility to recover part or all of its expenditure in the hypothetical insolvency, depending on circumstances (i.e. nature and features of insolvency regimes, quality of assets being liquidated). As a result, and as explained in the evaluation, this provision has never been used in practice 50 .

The DGS may also finance a transfer of business in insolvency proceedings (Article 11(6) DGSD), to the extent that this is necessary to preserve access to covered deposits and if it complies with the least cost test and State aid rules. The conditions to grant DGS funding in resolution and insolvency are not entirely aligned, which makes the use of DGS funds subject to uncertainty. Also in this case, the DGS’ super preference substantially limits the possibility for the DGS to provide funding.

Finally, the opportunity to use DGS funding in resolution or insolvency produces different consequences depending on whether the potential intervention is in a Banking Union or non-Banking Union context. For non-Banking Union Members States, both resolution and DGS funds are financed by the domestic industry, possibly facilitating a combined use of these funds. However, in the case of Banking Union Member States, the SRF is financed by all banks in the Banking Union while the financing of DGS fund is national, hence only by domestic banks, creating an “asymmetry” in the burden of the costs in case DGS would “substitute” the SRF. Moreover, a risk of shortfall in DGS funds (see problem 3 below) may occur and illustrates the potential benefits possible through pooling DGS funds at central level.

2.3.Problem 3: Uneven and inconsistent depositor protection and lack of robustness in DGS funding

The third problem identified in the evaluation relates to discrepancies in depositor protection across Member States both in terms of scope of protection and payout processes and in terms of vulnerability to shortfalls due to a lack of a robust and central/common safety net in the absence of EDIS 51 . The DGSD, recast in 2014, includes a high number of national options and discretions, which entitles depositors in certain Member States to different levels of protection. Beyond this inconsistent application 52 of the rules, depositor protection and confidence in the Banking Union could be undermined by the lack of an appropriate common safety net to national DGSs and equal treatment of all depositors. National DGSs still remain vulnerable to asymmetric shocks, which may put DGS funds at risk and create pro-cyclical effects for the banking sector as additional contributions may need to be raised in some Member States depending on the shock. By contrast, pooling national resources at a central level would deliver diversification effects and increase the robustness of depositor protection, possibly even lowering the burden on the industry in terms of replenishment needs.

The drivers behind this problem can be summarised as follows: (i) discrepancies in national depositor protection across Member States and (ii) insufficient means of national DGS to weather the impact of a large financial shock.

2.3.1.Discrepancies in national depositor protection across Member States

Gaps and fragmentation in the deposit protection and in the functioning of national deposit guarantee schemes persist due to the inconsistent application of the DGSD across Member States and various ONDs. This creates divergences in the robustness of DGS funds and uneven playing field in the protection that depositors enjoy in different Member States. The EBA published four opinions 53 highlighting the need for clarification in the DGSD 54 and reducing discrepancies in national depositor protection. The main discrepancies – also assessed in the evaluation and Annex 6 – are explained below.

In terms of scope of protection, the main problem relates to the divergence in coverage of temporary high balances (deposits above EUR 100 000) which are also protected under the DGSD. The coverage level varies among Member States and ranges from EUR 200 000 to an unlimited amount, creating uneven playing field. Other ONDs leading to discrepancies refer to the types of depositors, such as client funds of other financial institutions or public authorities which are protected differently across Member States 55 .

In addition, the robustness of the DGS funding varies across Member States due to differences in the national implementation of alternative funding arrangements, which could be relied on in case the DGS funds were depleted. The lack of additional resources in some Member States could impact the ability to pay out depositors (or conduct alternative interventions to support a bank) and endangers consumer confidence and financial stability.

Furthermore, when it comes to the use of preventive and alternative measures foreseen under Articles 11(3) and 11(6) DGSD, divergences in the least cost tests applied across types of intervention and Member States, hamper the predictability of the framework. They create inconsistencies around the requirements for the various possible uses of DGS funds (including in resolution), which are unclear and differently interpreted among Member States. As regards preventive measures, Article 11(3)(c) DGSD provides that costs of fulfilling the statutory or contractual mandate of the DGS should not be exceeded. Some Member States use the same least cost test for both preventive and alternative measures, while others did not develop a least cost test methodology for preventive measures (see Annex 6, section Error! Reference source not found.). This has the potential of creating an uneven playing field in depositor protection across the EU.

As also identified in the evaluation (see Annex 5, section 7.4), the interplay between the DGSD and other pieces of EU legislation raised coherence issues. As regards the interplay with the Anti-Money Laundering (AML) Directive, the EBA highlighted the need to clarify the roles and responsibilities of the DGS and other stakeholders during a payout and strengthen their cooperation and exchange of information to minimise the risk of payout to depositors suspected of money laundering. As regards the Payment services and E-money Directives, the DGS protection of client funds of non-bank financial institutions such as payment and e-money institutions or investment firms, varies across Member States and requires further clarification and harmonisation.

2.3.2.Insufficient means of national DGSs

Member States are steadily building up their DGS means to reach 0.8% of total covered deposits by 2024, as required under the DGSD. Despite this continuous build-up, DGSs remain vulnerable to asymmetric shocks. Such shocks may put a national scheme under stress, making it difficult to settle individual depositor claims within the statutory time or to intervene through other possible use of DGS funds. In such situations, a DGS may find it difficult to call upon pro-cyclical extraordinary ex post contributions from its members to make up for the shortfall. Alternative funding arrangements could include private or public sources, making eventually the sovereign the ultimate guarantor to national DGSs. Some national DGSs faced in the past considerable funding needs, representing a significant share of their available financial needs, resulting in continued reliance by national DGSs on the state as a backstop for depositor protection, which strengthens the bank-sovereign nexus (see Annex 5, section Error! Reference source not found.).

There is a high risk that DGS interventions could be impaired under a severe crisis 56 . The lack of consumer confidence in this context may also trigger deposits outflows, conducive to bank runs. Under a severe crisis in one bank or Member State, depositors could be incentivised to transfer their funds in another bank or even another country, potentially exacerbating financial difficulties of the initial bank or national banking sector 57 .

The absence of a common deposit guarantee scheme (i.e. EDIS) at Banking Union level which would optimise the allocation of financial means, represents a significant drawback for DGS resilience and an all-encompassing depositor protection. Failing to unlock the unused benefits inherent in the pooling of funds at a central level and larger firepower for industry-funded safety nets represents a lost opportunity to significantly increase the efficiency of national DGS protection and lower the burden on the industry in terms of ex ante contributions or ex post replenishment requirements. The absence of EDIS also deprives depositors from a seamless guarantee of protection regardless of the bank and country where they are located, potentially weakening consumer confidence. As experienced in the 2008 financial crisis, a strong bank-sovereign nexus may create risks to financial stability through contagion and negative consequences for the single market. The costs of an incomplete Banking Union lacking EDIS are high, while the benefits for taxpayers and the industry are not materialising to their full potential.

2.4.How will the problems evolve?

As the problem analysis shows, there is a need to improve several aspects of the current framework to address the inconsistencies, improve clarity and predictability of outcomes, foster the use of industry-funded sources (RF/SRF and DGS), avoid using public funds for the orderly handling of bank failures, to ensure that the original objectives of the CMDI framework of preserving financial stability, minimising the use of public funds and strengthening depositor confidence are reached. The improvement of the framework is particularly relevant, at this juncture, for better preparing the European banks for the adverse conditions that may potentially arise in the medium term, such as the ones stemming from asset quality deterioration as a result of a weaker macroeconomic outlook.

Failing to address the above shortcomings, as also analysed in the evaluation, exposes the framework to the risk of unbalanced outcomes, without exploiting its full potential and the possibility to resolve any credit institution, when this would yield a better outcome than insolvency. If solutions based on the use of industry-funded safety nets are not made more proportionate and accessible, these resources will remain idle, even though banks will continue to raise contributions and issue MREL eligible liabilities. At the same time, this may lead to prolonged recourse to public finances (which at this juncture face competing priorities), persisting bank-sovereign links and risks of moral hazard.

Ensuring the coherent and cost-effective application of the framework is even more important, given the continued absence of EDIS means risks to the robustness and resilience of depositor protection (including under large economic shocks) as well as to the funding toolkit of the framework. It deprives the European consumer of a mutualised safety net financed by industry contributions, which would also reduce the continued tension on public finances.

Ultimately, the Banking Union is not complete without reforming the crisis management and deposit insurance, its second pillar, and implementing EDIS, its third pillar. An incomplete Banking Union bears costs and risks, including risks in terms of financial stability, market fragmentation, under-performing banking sector, where failing banks are not always exiting the market, leading instead to regular calls for public support. The completion of the Banking Union together with the deepening of the Capital Markets Union are pivotal to ensure financial stability, foster market integration and support a genuine Economic and Monetary Union. The latter two are fundamental steps towards enhancing the EU’s open strategic autonomy and the international role of the euro.

3.Why should the EU act?

3.1. Legal basis

The regulatory requirements for crisis management and deposit insurance are already set at EU level (both via Regulation and Directive). Consequently, the legal basis for the CMDI review is the same as the legal basis of the original legislative acts, namely Article 114 TFEU for the BRRD and SRMR, and Article 53(1) TFEU for the DGSD.

3.2.Subsidiarity: Necessity and added-value of EU action

The rationale for a specific and harmonised EU resolution regime for all banks in the EU was laid out at the inception of the framework in 2014 58 and its main features reflect international guidance and the key attributes for effective resolution regimes developed by the Financial Stability Board in the aftermath of the global financial crisis.

The principle of subsidiarity is embedded in the existing CMDI framework, as its objectives could only be achieved at Union level through EU action – the harmonised resolution and deposit insurance framework. This is underpinned by recital 131 of BRRD I, which stipulates that the effect of a failure of any institution in the whole Union justifies action at EU level: “Since the objective of this Directive, namely the harmonisation of the rules and processes for the resolution of institutions, cannot be sufficiently achieved by the Member States, but can rather, by reason of the effects of a failure of any institution in the whole Union, be better achieved at Union level, the Union may adopt measures, in accordance with the principle of subsidiarity as set out in Article 5 of the Treaty on European Union. In accordance with the principle of proportionality, as set out in that Article, this Directive does not go beyond what is necessary in order to achieve that objective.”

The intention of the existing CMDI framework has always been to provide a common toolbox to deal effectively with any bank failure, irrespective of its size, business model or location, in an orderly way, preserving financial stability of the EU, the Member State or the region in which it operates, and protecting depositors without relying on public funds. In this context, recital 29 of BRRD I outlined that ‘due to the potentially systemic nature of all institutions, it is crucial, in order to maintain financial stability, that authorities have the possibility to resolve any institution’.

The review aims to amend certain provisions of the BRRD, SRMR and DGSD and for technical completeness, also considers one policy option including EDIS (see Chapters 5 and 6). The problems identified in Chapter 2, unveiled that the European CMDI framework should be improved, in particular when it comes to its application to small and medium-sized banks, as otherwise it may not reach its objectives (see Chapter 4).

The following considerations justify the need for EU action with regard to the CMDI reform and highlight that the review fully complies with the principle of subsidiarity.

First, the merits of having in place a resolution framework that could potentially be applied to any bank, irrespective of its size, remain unchanged. Placing small and mid-sized banks under national insolvency proceedings (also applicable to non-financial corporates) may not always be appropriate for managing their failure, as explained in Chapter 2. Moreover, a system where the EU harmonised resolution framework would only cover larger banks with cross border activities, while national regimes would cover domestic, small/mid-sized banks would not be conducive to a level playing field in the single market as it would risk creating a two-tier system for banks in the EU, making small and domestic banks that are too big to liquidate more risky/unattractive for consumers and businesses relative to larger ones, because their failure would be managed under national insolvency laws, which do not guarantee the continuation of critical functions, the protection of client relationship and of the bank’s franchise asset value and may inflict losses on uncovered deposits.

Second, the non-application of the harmonised resolution framework in one Member State may have cross border repercussions. In the EU single market, and in particular in the Banking Union, it is key to enhance preparedness for crisis time and to equip resolution authorities with a common toolbox and harmonised set of powers to preserve the level playing field and competitiveness among industry players, depositors and taxpayers across the single market. The value-added of EU action also consists in enhancing preparedness for crisis – thanks to the requirement for banks to set-up internal loss absorbing buffers, remove impediments to resolution and the set-up of industry-funded safety nets complementing these internal bank buffers – to avoid recourse to public funds for all banks and not only cross-border ones. The possibility to access the EU harmonised CMDI framework acts as a safeguard at the level of each Member State, but also for the EU as whole, to ensure that the management of a bank’s failure does not put at risk financial stability, the integrity of the single market, the resilience of the European Monetary Union. Risks to financial stability, depositor confidence or the use of public finances in one Member State may have far-reaching impacts on a cross border basis and may ultimately contribute to a fragmentation of the single market and an intensification of the sovereign-bank nexus.

Third, acting at EU level to reform the CMDI framework will not prescribe the strategy that should be taken when banks fail. The determination of choosing an EU harmonised resolution strategy/tool or the national liquidation strategy is at the discretion of the resolution authority on the basis of the public interest assessment, which is tailored to each specific failure case and not automatically driven by considerations such as the bank size, the geographical outreach of its activities and structure of the banking sector. This makes, de facto, the public interest assessment the subsidiarity test in the EU. Overall, other considerations beyond size, such as functions that are critical for the broader economy (deposit taking, lending, payments) and their substitutability, interconnectedness to other actors in the financial system, risk profile and nature of activity are important for resolution authorities when assessing the impact of a bank’s failure on financial stability and the public interest to resolve the bank.

Fourth, the decision-making process regarding the choice between EU harmonised measures versus national specific measures to tackle a failing bank remains at the discretion of the authority in charge and aims to address a variety of cases depending on the circumstances. Outside the Banking Union, decisions on whether to apply the resolution framework or national procedures are taken at a national level (by the national resolution authority). Within the Banking Union, decisions are made via the Single Resolution Mechanism – a dual mechanism where the SRB (Banking Union level authority) works closely and cooperates with national resolution authorities in joint resolution teams. Decisions are centralised at Banking Union level for the largest banks (120 banks under the direct SRB remit) and left at national level for the less significant ones (about 2200 less significant institutions (SRB, Annual Report 2021 )), therefore fully preserving the capacity of these national authorities to put a bank in liquidation if the objectives would not be best met using resolution. Thus, while a case-by-case basis needs to be used for assessing whether a bank undergoes resolution or not, it is critical that the possibility for all banks to undergo resolution is preserved, due to the, potentially, systemic nature of all institutions, as already foreseen in BRRD I and also evidenced in Annex 4,  Box 6 .

Fifth, Member States may still consider liquidation for the smaller banks under the reformed CMDI framework. In this respect, national insolvency regimes (unharmonised) remain in place when an insolvency procedure is deemed superior to resolution. For some small banks, liquidation is likely to apply. The continuum of tools is preserved in this way, including tools outside resolution: preventive and precautionary measures, resolution tools, alternative measures to payout in insolvency and payout of depositors in case of piecemeal liquidation in insolvency. Among those tools, only the resolution tools and payout of depositors in liquidation are available to all banks in all countries.

The reforms envisaged with regard to the DGSD, which provide for improvements to depositor protection, also comply with the subsidiarity principle. This is due to the fact that the harmonisation of insurance coverage, scope, eligibility of depositors and payout delays can be better achieved at EU rather than at national level, to ensure a level playing field and fair and equal treatment of depositors across the EU. This was also underlined by the EBA in its opinions on the DGSD.

Importantly, Member States 59 and the European Parliament agree that the CMDI framework needs to be fixed in a way that EU action via the harmonised resolution framework can be used for any bank where needed. Despite the widely shared intention of protecting taxpayer money embedded in the CMDI framework since 2014, some Member States have continued to make recourse to taxpayer money when handling failing banks, since the establishment of the framework, as evidenced in Chapter 2 and Annex 5. This is not because they find it politically or economically acceptable to do so, but because they had to choose between protecting financial stability and depositors on one hand and protecting taxpayer money on the other hand. Appropriate level of MREL must remain the first line of defence for all banks that are put in resolution. At the same time, certain small and mid-sized banks find it challenging to access resolution funding, which some banks can only attain if deposits bear losses. However, inflicting losses on deposits would pose a significant risk to financial stability, as depositors would lose confidence in the banking sector and likely provoke bank runs and spiralling contagion, which can reverberate also into the real economy, as seen during the global financial crisis. More concretely, the failure of a small/mid-sized banks active in a local region and community may cause losses to its clients regarding their claims exceeding the coverage level of EUR 100 000 when placed under national insolvency proceedings (households, SMEs, corporates, local and regional public institutions such as schools, hospitals, other financial institutions).

Figure 6 shows the repercussions the identified problems have on the general objectives.

Figure 6: Implications of the identified problems on the general objectives

Source: Commission services

The objectives pursued by the existing legislative acts can be better achieved at EU level rather than by different national initiatives:

·Foster financial stability, ensure market discipline and the continuity of critical functions for society: Due to the strong interlinkages between national financial sectors and the risk of spill-overs, the objective of financial stability in bank crisis management and deposit insurance can be better achieved by EU action compared to individual national actions.

·Safeguard the functioning of the single market and ensure a level playing field across the EU: Given the freedom of banks to establish and provide services in other Member States, EU action is preferable to prevent distortions to the single market and ensure a level playing field, which is a pre-condition for a symmetric impact of the ECB’s single monetary policy. Action at EU level can for instance ensure that credit institutions operating in more than one Member State are subject to the same requirements concerning DGSs, which avoids unwarranted compliance costs for cross-border activities. EU action also fosters convergence of supervisory and resolution practices across the EU. An intervention at EU level also promotes further market integration by ensuring that cross-border bank failures can be resolved in a predictable, effective and equitable manner. At the same time, also smaller banks that primarily operate on domestic markets should – in the spirit of the single market – be treated in a similar manner, regardless their location, while respecting proportionality.

·Minimise recourse to taxpayer money and weaken the bank-sovereign loop: For banking groups that are active in a cross-border context, national solutions, without coordination among Member States, would be costlier for citizens and taxpayers than if the failure of banking groups was governed by comprehensive and harmonised rules and arrangements and in the case of Banking Union banks, managed centrally at EU level. On another scale, banks active on a more local/regional level are often interlinked with the local economic fabric and may constitute a risk for the local real economy, including households and SMEs that hold deposits in such banks. In addition to banks’ loss absorbing capacity, national safety nets (resolution funds and DGS) financed by the industry could be used in a complementary way to better achieve the framework’s objectives. If losses were not covered by prudential capital buffers of individual institutions and safety net funding, this may lead to recourse to public funds (sometimes at sub-regional level) aiming to safeguard financial stability and protect depositors. Also, for smaller banks operating primarily on domestic markets, national procedures available and the reliance on the sovereign should not create an unlevel playing field among and also within Member States. The lack of action at EU level for less significant banks and their perceived exclusion from a mutualised safety net would also potentially affect their ability to access markets and attract depositors when compared to significant banks. Consequently, national solutions to tackle bank failures would worsen the sovereign-bank link and undermine the idea behind the Banking Union of introducing a paradigm shift from bail-out to bail-in.

·Protect depositors and ensure consumer confidence: By harmonising the financing by DGSs, depositor confidence is maintained and cross-border distortions of competition are avoided (the same holds for possible competition distortions within Member States). Otherwise, during a crisis time, bank customers might shift their funds from banks with less depositor protection to other ones with more protection (within the same Member States or in another one). This may potentially lead to fund outflows with potential adverse financial stability and real economy consequences. Moreover, the harmonisation of coverage, scope, eligibility of depositors and payout delays pursued in the DGSD review cannot be sufficiently achieved if Member States were to act independently from each other and can be consequently better achieved at EU level.

4.Objectives: What is to be achieved?

4.1.General objectives

The review of the CMDI framework will aim to achieve an adequate balance among the following general objectives:

(1)Contribute to financial stability, ensure market discipline and the continuity of critical functions for society;

(2)Safeguard the functioning of the single market and ensure a level playing field across the EU;

(3)Minimise recourse to taxpayer money and weaken the bank-sovereign loop;

(4)Protect depositors and ensure consumer confidence (see Error! Reference source not found. 2, Annex 5).

4.2.Specific objectives

The impact assessment will consider the following specific objectives:

(1)Further enhance legal certainty and predictability and strengthen a level playing field as regards the coherent application of the tools available in bank resolution and insolvency;

(2)Facilitate access to safety nets in case of bank failure and improve the clarity and consistency of funding rules;

(3)Further align the national approaches to depositor protection, including in terms of coverage, and upgrade the capacity of national DGSs’ to withstand local shocks.

5.What are the available policy options?

5.1.Approach to design of policy options

The CMDI and the State aid frameworks for banks are strongly inter-related. Jointly reformed, they would create a system of European rules and incentives, where the availability of tools and funding sources (subject to conditions for access), combined with discretionary assessments by resolution authorities, determine the choice of crisis management strategies and procedures to deal with failing banks 60 . The creation of a common safety net for the protection of deposits, for example via EDIS 61 would support national DGS funds in need, enhance the funding sources available to handle failing banks (beyond the internal loss absorption capacity and the RF/SRF) and achieve synergies in the framework. However, EDIS is not part of the preferred option for reforming the CMDI framework due to lack of political feasibility, in the absence of an endorsement by Member States and the European Parliament.

Given the critical interplay among key policy aspects (e.g. the availability of funding, the scope of resolution through the PIA, outcome of the least cost test), the approach to formulating policy options needs to be a holistic one. It bundles together relevant design features of the framework to deliver consistency in the resulting packages of options. The aim is to provide a coherent and logical articulation for each encompassing package of policy options. However, each package delivers different degrees of effectiveness and efficiency in achieving the key objectives, as envisaged and assessed in Chapter 6. Interchanging elements across option packages could create inconsistencies and reduce the intended improved effectiveness, efficiency and coherence of the framework.

Such approach is also indispensable to remedy the inconsistencies (as well as the incentives for using the framework and avoid fragmentation in the single market) which, as described above, have often occurred because the individual legislative texts (comprising the EU bank crisis management and deposit insurance framework) were originally proposed and negotiated on a standalone basis and not assessed jointly 62 .

5.2.Review of the 2013 Banking Communication on State aid rules

The Commission has direct enforcement powers in relation to State aid rules which derive from the Treaty (Article 107 TFEU). In the context of the global financial crisis, the Commission clarified its assessment of compatibility of State aid measures, in several Communications, including, among others, the 2013 Banking Communication. The State aid framework for banks is closely interlinked with, and complementary to, the CMDI framework. In particular, it governs the burden sharing requirements, a condition to use public funds qualified as State aid for resolution 63 , preventive and precautionary measures or alternative measures in insolvency. The two frameworks are applied consistently by the Commission. For example, the Commission checks if a public or private support qualified as a State aid measure violates intrinsically linked provisions of the CMDI framework and cannot authorise it, if it does so. Despite their natural interlinkages, the two frameworks are meant to tackle different issues: State aid rules’ main purpose is to limit competition distortions from such support to banks, while the CMDI framework’s primary objective is to limit risks to financial stability from the disorderly management of bank failures while avoiding or minimising the use of public funds.

In November 2020, the Eurogroup invited the Commission to carry out and finalise its review of the State aid rules for banks, in parallel to the review of the CMDI framework, ensuring their entry into force at the same time as the revised CMDI framework. Such timeline aims at ensuring consistency between the two frameworks, adequate burden sharing of shareholders and creditors to protect taxpayers and depositors and preserve financial stability 64 . In June 2022, the Eurogroup took note of the intention of the European Commission to finalise the review of the State aid framework for banks, to ensure consistency between the State aid framework and the renewed CMDI framework. 

Having the objective of coherence in mind, it is important to underline that the CMDI framework is subject to co-legislation, which will require time before implementation, and its outcome as compared to the Commission proposal is uncertain, while an update of the State aid rules requires a Commission Communication, which, when decided by the Commission, could take effect immediately.

Notwithstanding the interactions between the various components of the current legislative framework, the reform of the State aid rules is not part of the present impact assessment nor of the subsequent legislative proposal. A separate process to assess the need for a review of the State aid rules is ongoing, in parallel to the review of the CMDI framework, also in light of different procedures to amend the relevant acts 65 .

Provided coherence is maintained within the packages of policy options, all the options envisaged for CMDI would bring an improvement compared to the baseline (status quo), irrespective of the changes to the State aid rules (or status quo) which may take place. An enhanced alignment between the frameworks would usefully complement the changes proposed to the CMDI rules.

5.3.What is the baseline from which options are assessed?

Under the baseline option, the existing CMDI framework as well as national regimes for handling failing banks would continue to apply without any legislative changes and would function without a common deposit guarantee scheme in the Banking Union in the absence of an agreement on a Banking Union work plan including EDIS by the Eurogroup in June 2022 and of progress on the EDIS file in the European Parliament  66 .

Despite ongoing developments in the interpretation and methodological approach to the PIA 67 , broad discretion in its application would continue to be exercised by resolution authorities, with the risk of maintaining the divergence across the EU on the scope of banks placed in resolution or insolvency. This means that similar bank failures would continue to be managed under divergent frameworks. Some may continue to be handled under the harmonised resolution framework, while others would be bailed-out with taxpayer money, thus continuing to create issues for the EU’s single market in banking and the equal treatment of banks’ shareholders, creditors and customers.

In terms of funding, the framework would continue to rely on two existing safety nets under divergent access conditions: the RF/SRF in resolution and the national DGS funds covering different types of interventions (preventive measures, resolution, payout of covered deposits and alternative measures in insolvency). The condition to access the RF/SRF 68 for liquidity support would remain subject to interpretation. Access to the RF/SRF for certain smaller and medium-sized banks for solvency support would remain challenging in view of the minimum bail-in access condition of 8% TLOF (despite their contribution to the RF/SRF). Tapping the DGS for contribution to various interventions would continue to be difficult and unclear from a legal point of view, due to divergent access conditions across Member States, in particular the least cost test (as shown in Chapter 2 and the evaluation). Persisting differences in the hierarchy of claims would continue to make the level of depositor protection vary per Member State, creating difficulties for resolution authorities when assessing the risks for creditors being worse off in resolution than in insolvency 69 , while the super-preference of the DGS would make it almost impossible for DGS funds to be used in resolution or insolvency under the least cost test (see in Annex 7).

In addition, the current room for regulatory arbitrage would remain unchanged, leaving the possibility to apply restructuring measures under national insolvency laws financed through DGS alternative measures or through taxpayer money because of the more favourable conditions for banks’ creditors than under resolution, rather than merits in terms of effectiveness and efficiency.

At the current juncture, in the context of the challenging macroeconomic outlook fuelled by the energy crisis and the geopolitical situation, the need to improve the CMDI framework is pressing if the likelihood of failures were to increase in case distress in our banking sector started to materialise. Under the status quo, even those failing banks for which resolution would be in the public interest, would continue to be restructured or liquidated outside the harmonised resolution framework, under existing heterogeneous national regimes, where in some cases only disorderly and costly insolvency proceedings or solutions involving taxpayer money exist. This would weaken consumer confidence in the EU banking sector and the predictability and level playing field of our single market for banking, and of the Banking Union in particular.

More concretely, first, the handling of banks’ failure would remain inefficient from a cost perspective, as taxpayer money would continue to be used despite the build-up of considerable MREL buffers and very significant safety nets (e.g. the SRF is forecasted to exceed EUR 80 bn by the end of 2023 in the Banking Union and the aggregate amount of national DGSs to exceed EUR 56 bn across the EU). Also, the franchise value of the failing bank’s assets and its client relationship would deteriorate, leading to overall loss of value. Second, costs would not be sufficiently redistributed from taxpayers to shareholders and creditors, despite this being one of the main objectives of the BRRD/SRMR and the Banking Union created in the aftermath of the global financial crisis. Third, the baseline option would not foster consumer confidence in the banking sector, in particular when the certainty of outcomes cannot be guaranteed, which may create spiralling contagion to other banks and the risk that bank clients may start questioning the solidity of the system and its safety nets, with no improvement over what could happen under insolvency proceedings.

The European Parliament and the Council have also acknowledged this risk and repeatedly called on the Commission to deliver the CMDI legislative package with high urgency.

5.4.Overview of the policy options

Figure 7: Overview of policy option packages and the interaction of their key elements

Source: Commission Services

* Eurogroup statement of 16 June 2022.

5.5.Common elements across the packages of options

Some changes proposed are common across all option packages (except the baseline). These include elements related to: depositor protection, early intervention measures, triggering of failing or likely to fail status of a bank (FOLF) and winding-up under insolvency.

The packages of options closely follow the advice provided by the EBA for the CMDI review through the set of four opinions dedicated to the review of the DGSD functioning and the response to the call for advice on funding in resolution.

As shown in the evaluation in Annex 5 and the problem definition, these aspects would require amendments to improve the framework, however they are not driving the distinctions among the option packages. Alternatives to the proposed policy changes on the common elements have been analysed and evaluated in Annexes 6, 7 and 8 and subsequently, the preferred option for the common elements was integrated in this impact assessment (section 6.3). As shown in these annexes, the analysed alternatives to the preferred policy options would not have addressed the problems of clarity and predictability of the framework to the same extent as the preferred options. Including all possible variations for these elements in the packages of options as alternative options would have resulted in a very large number of possible combinations. Some of these would have been rather arbitrary and would have complicated the reading of the options without adding value in terms of coherence and consistency.

In view of these considerations, the main report will focus on the core elements driving the main differences across the coherent packages and which are described in Chapter 6: the scope of resolution (PIA), the funding solution and access conditions to the industry-funded safety nets, DGS interventions and related conditions and possible cost synergies for banks. In the absence of EDIS, the governance and decision making process on the use of funds between national and European authorities (SRB) would not change in principle under this initiative.

Figure 8: Elements common across all option packages (see also section 6.3 and Annex 8)

Source: Commission Services

5.6.Options discarded at an early stage

Additional policy options were analysed and discarded at an early stage: (i) resolution as the sole procedure for banks needing restructuring, (ii) set-up of a parallel harmonised national regime in insolvency – an orderly liquidation tool, (iii) withdrawal of the 2015 Commission EDIS proposal without a replacement and (iv) incompatible permutations between elements in the option packages presented in Chapter 6. The assessment of these additional options together with a rationale for their discarding is presented in Annex 14.

6.What are the impacts of the policy options and how do they compare?

In this section, each package of policy options considered is assessed against how it addresses the identified problems and problem drivers (see Chapter 2) along the criteria of effectiveness (general objectives), efficiency (benefits-costs), political considerations, feasibility 70 and coherence with EU rules.

Each of the three packages of policy options (other than the baseline) strives to create an incentive-compatible framework where the application of resolution tools and of alternatives outside resolution is achieved in a more consistent manner, increasing legal certainty and predictability, levelling the playing field to safeguard the functioning of the single market, facilitating access to common safety nets, protecting depositors and ensuring consumer confidence, while reducing the contingency for taxpayer funds. Depending on the degree of ambition embedded in their design, the packages of options achieve these objectives to a different extent, also with a varying degree of political feasibility.

The key features analysed under each option in relation to the mentioned criteria and which drive the differences across the option packages, are: the clarification of the resolution scope through the PIA, the conditions to access industry-funded safety nets, the use of DGS funds and the harmonisation of its access conditions across various types of interventions, implementing a depositor preference in the hierarchy of claims and synergies through cost reductions for the industry. These dimensions are the most important in the overall comparison of option packages because they touch on the core issues identified in Chapter 2 and they determine the coherence and interdependence between the sub-elements of the consistent packages of options.

The policy option packages 2 and 3 are assessed against the background of the 2015 EDIS proposal under the assumption that political negotiations remain on hold 71 , while the policy package 4 is a technical option included for completeness, assuming the implementation of EDIS as the third pillar of the Banking Union (although EDIS has not yet been politically endorsed by the Council or European Parliament).

The most relevant evidence underpinning the analysis of policy options in this chapter includes, among others, analysis of past cases of bank failures, data provided by the EBA in its opinions on the functioning of the DGSD in the current framework, empirical evidence by the EBA in its reply to the Commission’s call for advice on funding issues in resolution and empirical evidence provided by the Commission’s JRC regarding key policy options pertaining to the DGSD related policy options. A complementary, more detailed summary of the evidence used in this impact assessment is also provided in Annex 1, sections 3 and 4.

6.1.Assessment of policy options

6.1.1.Option 2 – Slightly improved resolution funding and commensurate resolution scope

This option entails a revision of several elements of the CMDI framework, where slightly more resolution funding would be made available and, therefore, a commensurate larger scope of banks would be placed in resolution compared to the baseline. However, the outcome in terms of fixing the issues identified and reaching the objectives listed in chapter 4 will be marginal in comparison with options 3 and 4.

6.1.1.1. Public interest assessment

Under this option, a widening of the PIA scope would be achieved through legislative change to ensure that, following this assessment, resolution would be applied to more institutions than under the baseline option, when this best achieves the objectives of preserving financial stability, protecting deposits and taxpayer funds. While retaining the discretionary nature of the PIA decision by the resolution authority, the PIA legal amendments would include additional considerations for the achievement of the resolution objectives such as: (i) a regional dimension in the assessment of critical functions of the bank and of risks to financial stability (in addition to national one as in the current framework), (ii) the need to preserve DGS resources and (iii) the possible granting of State aid in insolvency 72 . However, under this option, the amendments to the PIA would not include a positive presumption of public interest/resolution unlike under option 4. Option 2 would improve, to some extent, the legal certainty in applying the PIA and determining the scope of banks going in resolution and better frame the discretion of resolution authorities. However, higher risks of divergences across the EU are likely to remain in the absence of sufficient access to funding. Such a relative expansion of the resolution scope to more small/medium-sized banks under this option is coherent with a relatively less robust funding solution when compared to options 3 and 4. As described in the next section, the funding solution of option 2 may fail to effectively underpin a broader application of resolution tools to more smaller/medium-sized banks due to the lack of sufficient funding to sustain resolution actions. The number of additional banks that were earmarked for liquidation strategy under the baseline and would go in resolution under this option cannot be estimated upfront, as the PIA remains a case-by-case assessment by resolution authorities, retaining elements of discretion and is highly dependent on the financial condition of the bank at the moment of failure as well as on its access to funding (bank’s loss absorption capacity and safety nets) to conduct a successful resolution. Moreover, the strategy set out for a bank by the resolution authority at the planning stage (resolution versus liquidation) is a presumptive path based on backward looking information which allows deviations to take account of the specific situation at the moment of failure (e.g. idiosyncratic versus systemic crisis, level of losses, available loss absorbing capacity in the bank, existence of a buyer, access to funding from safety nets if needed, impact on deposits and on financial stability).

6.1.1.2. Conditions to access industry-funded safety nets

Broadening the scope of PIA and placing more banks in resolution without facilitating access to more funding in resolution, in particular for small/medium-sized banks with a large deposit base, would increase the risk to financial stability or recourse to taxpayer money. Therefore, the design of these two features, scope expansion and funding, have to be approached consistently and holistically.

The core access condition to the RF/SRF (minimum bail-in of 8% TLOF) remains in place to ensure protection of the fund against moral hazard 73 . Under this option and only in case of transfer strategies 74 , depositors (including beyond covered ones) could be shielded from taking losses in order to meet this requirement, provided that such discretionary exclusion from bail-in is justified on financial stability grounds, as already foreseen by the framework. To achieve this objective, once the first line of defence against losses – the internal loss absorbing capacity of the bank (except deposits) is used, the DGS would intervene 75 to support transfer strategies with market exit and cover losses that would have otherwise been allocated to depositors to meet the 8% TLOF requirement in order to access the RF/SRF. The DGS can intervene to this effect, if allowed, and up to the amount determined by the least cost test to ensure that the intervention is less costly than in a payout of covered deposits. Subject to conditions and safeguards (only transfer strategies with market exit and least cost test - see also Box 2 for further details), this adjustment would facilitate the use of RF/SRF (a combination of DGS and RF/SRF) for a larger number of smaller/medium-sized banks with a large deposit base, while maintaining a strict access condition to the fund, avoiding moral hazard and at the same time allowing resolution authorities to shield depositors from taking losses when that is a threat to financial stability 76 .

As shown by the statistical analysis in Annex 7 (section 3.2.1), under a baseline scenario 77 , deposits (non-preferred, preferred and in a few cases also covered) in 96 banks (26.1%) located in 20 Member States would suffer losses when reaching the 8% TLOF threshold up to an aggregate amount of EUR 18.3 bn, based on balance sheet data as of Q4 2019. In three Member States, deposits in more than half of the banks in the sample would be affected. When only institutions which already had resolution strategies under the 2019 PIA decision were considered, deposits in 44 banks would be affected up to an aggregate amount of EUR 14.2 bn in 18 Member States. Under more severe scenarios of equity depletion in the run up to a crisis, the share of affected banks would increase significantly 78 . This would be mitigated to an extent when changing the tiered depositor preference in the hierarchy of claims to a two-tier depositor preference (see section 6.1.1.4) by virtue of prioritising all deposits versus other senior ordinary unsecured claims.

The revisions under this option would improve the access to funding in resolution and introduce more proportionality for banks that would be resolved under transfer strategies, by protecting deposits from bail-in 79 , addressing in an effective manner the problem pertaining to funding identified in Chapter 2.

6.1.1.3. Use of DGS funds

As under all options, the DGS would continue to contribute to the payout of covered deposits, as well as to the use of preventive, resolution and alternative measures in insolvency. In order to facilitate an effective DGS intervention, the following adjustments and clarifications to the access conditions to the DGS funds would be required:

·DGS contribution and access condition to preventive measures: the conditions for the intervention of a DGS for preventive measures (Article 11(3) DGSD) would be improved by including relevant safeguards, i.e. ensuring that preventive measures would be subject to an adequate least cost test and that a solid rationale exists to justify the DGS intervention 82 . To ensure consistent, credible and predictable outcomes when applying crisis management tools, the least cost test would be harmonised to govern the use of DGS funds outside payout of covered deposits in insolvency 83  but would take into account the specificities and timing of preventive measures.

·DGS contribution and access condition in resolution and insolvency: the provision on the DGS use in resolution (Article 109 BRRD) would clarify 84 that the DGS could also finance the transfer of deposits beyond the covered ones, if needed to execute a sale of business transaction in resolution. The least cost test conditioning the DGS intervention in resolution would be fully aligned with the least cost test for alternative measures in insolvency.

·Least cost test: the least cost test conditioning the DGS interventions would provide elements for its quantification and the types of costs (direct and/or indirect) that it could include 85 . 

These adjustments to the conditions for accessing DGS funds would significantly increase the legal clarity and applicability of rules and simplifying the framework by harmonising some of the conditions, addressing problem 2 described in Chapter 2. These amendments which are closely inter-related would contribute to a more coherent and incentive-compatible framework.

6.1.1.4. Harmonisation of depositor preference in the hierarchy of claims: two-tier preference

As explained in section 2 of Annex 8 and sections 4.1.1 to 4.1.3 of Annex 7, the super-preference of the DGS, in line with the current framework (baseline scenario) and its impact on the least cost test, is the main reason why the DGS cannot be used outside a payout event under the least cost test 86 (see also Box 3 ). Withdrawing this super-preference and envisaging a more harmonised depositor preference, when compared to the current situation with a three-tier depositor preference, is instrumental in accessing funding in resolution and making resolution effective for smaller and medium-sized banks. Option 2 explores the impacts of achieving a two-tier depositor preference without the super-priority of covered deposits and DGS in the hierarchy of claims.

The implementation of a two-tier depositor preference without the super-preference of DGS and covered deposits would require two changes in the BRRD rules on the ranking of deposits (Article 108 BRRD). First, the legal preference in the hierarchy of claims would be harmonised at EU level to include all deposits, meaning deposits would rank above ordinary senior unsecured claims in all Member States. Second, the current three-tier approach would be replaced with a two-tier ranking, whereby covered and preferred deposits would rank pari passu and above non-preferred non-covered deposits 92 . Annex 7 and 8 further describe the detailed impact of different depositor preference scenarios assessed, varying in scope and relative ranking among deposits.

Introducing a depositor preference in the hierarchy of claims (be it a two-tier or single-tier, as proposed in option 3) would facilitate the bail-in of ordinary unsecured claims and potentially decrease the likelihood of inflicting losses on deposits. It would also mitigate risks related to potential breaches of the NCWO safeguard currently existing in the baseline option, which could arise when some of the deposits that rank pari passu with ordinary unsecured creditors are discretionarily excluded from bail-in by the resolution authority, on contagion and financial stability grounds 93 . This, in turn, may give rise to legal challenges and potential compensation claims by the ordinary unsecured creditors if they can prove that they were treated worse-off in resolution than in insolvency, particularly when they represent a significant share of the ordinary senior unsecured class. At the same time, keeping via the two-tier approach a distinction between covered and preferred deposits (i.e. eligible deposits of natural persons and SMEs) on one hand and the remaining non-covered deposits on the other hand, would facilitate the bail-in of the latter deposits, in situations where that would not affect financial stability, thereby preserving some flexibility by resolution authorities on how to allocate losses. However, as explained in Annex 8, considering that smaller and medium-sized banks primarily serve retail and SME clients and that the volume of “wholesale” deposits may not be material in some banks, this flexibility may not be used in all cases.

The removal of the DGS super-preference would increase to a relative extent, compared to the baseline, the amount of funds the DGS could contribute for measures other than payout under the least cost test. However, because the DGS would still be a preferred creditor in relation to non-covered non-preferred deposits, the increase in DGS funds unlocked under the least cost test for these measures would be significantly lower than under a single-tier depositor preference explored in options 3 and 4, where all deposits would rank pari passu in the hierarchy of claims.

According to the quantitative analysis in Annex 7 (section 4.1.3), 48 banks would require additional resources to meet 8% TLOF and access the resolution fund without imposing losses on depositors when preferring deposits versus ordinary unsecured claims, as opposed to 91 banks under the current hierarchy of claims, which does not feature a preference of deposits. A two-tier depositor preference without the super-preference for DGS would lead to a least cost test result where the DGS could contribute for 18 banks out of the 48 to bridge financing needs to shield deposits from losses and help meet the 8% TLOF condition to access the RF/SRF. The number of banks where the DGS funds could contribute under a two-tier preference without super-priority for DGS would be improved compared to the baseline, where only three banks could benefit from DGS contributions but it would be lower than under a single-tier depositor preference where 41 banks could benefit from DGS contributions (considered under options 3 and 4). Under the two-tier depositor preference without the super-priority for DGS claims, the DGS intervention to plug the gap towards accessing the resolution fund would be sufficient to meet 8% TLOF in 13 cases (out of the 48) versus two under the baseline and 31 banks under a single-tier depositor preference (options 3 and 4). In terms of euro amount, the DGS could be allowed to contribute under the least cost test for an estimated amount of EUR 0.21 bn under a two-tier depositor preference without the super-priority for DGS, compared to EUR 0.05 bn under the baseline and EUR 0.98 bn under a single-tier depositor preference. Table 25 in Annex 7 also shows that maintaining the super-preference of DGS does not unlock more funds compared to the baseline, even if all depositors were preferred compared to ordinary unsecured claims. Therefore, removing the DGS super-preference is an important element of the preferred policy option to reach the objectives envisaged by this initiative.

Annex 8 explains in detail why the removal of the super-preference of covered deposits and the DGS in the hierarchy of claims does not impede in any way on the protection enjoyed by covered deposits, but it allows for the use of DGS funds earlier and in a more effective and efficient manner.

Some stakeholders (including a few Member States and banks) argue that preserving a super-priority for DGS in the hierarchy of claims is instrumental in ensuring the recovery of funds used to payout covered deposits in insolvency, even if the creditor payout in insolvency can take many years (depending on the judicial system in each Member State and the approach to liquidate assets 94 ). Importantly, the amount of cash the DGS must disburse in a payout in insolvency corresponds to the total amount of covered deposits in bank (plus other direct costs) and, as shown in the evaluation (sections 7.1.4.4. and 7.2.2.6), it is likely to be significantly higher than the amount the DGS would need to contribute to fund the gap between assets and liabilities for facilitating a transfer strategy in resolution or as alternative measure. Additionally, by facilitating transfer strategies in resolution, the franchise value of the failing bank’s assets is preserved as opposed to insolvency 95 and so is the client relationship, which is transferred to a new bank rather than being interrupted, avoiding thus potential contagion effects and impacts on financial stability. Therefore, the difference in costs for the DGS between pursuing more resolution versus insolvency lies in the more efficient usage of funds, facilitated by removing the super-preference of DGS in the hierarchy of claims.

6.1.1.5. Use of industry-funded safety nets and cost synergies for banks

The assessment of costs and potential synergies for the industry looks at two main aspects: (i) impacts on banks’ contributions to safety nets and (ii) the impact of the policy measures on the banks’ requirements to hold loss absorbing capacity.

Regarding the contributions to safety nets, under option 2, banks will continue to contribute to the safety nets (RF/SRF and DGS) as under the baseline option (status quo), without any changes to the contribution levels. However, facilitating the use of DGS funds to support the financing of various measures outside payout by modifying the hierarchy of claims may lead to a more frequent usage of these funds and potentially drive up the replenishment burden for the industry, despite the mitigation by the least cost test. It should be noted however, that depending on the features of the sale of business transactions and the form of the support measures required, such replenishment obligations/ex post contributions may not materialise for banks (e.g. DGS may contribute with guarantees to the buyer rather than cash injection). Moreover, ex post industry contributions to replenish a depleted DGS fund may not only be triggered by the uses of DGS in resolution or alternative measures; they may also occur when the recovery of proceeds from the insolvency estate following a payout event takes very long time. The net impact for the industry in terms of DGS replenishment needs cannot be estimated as it would be a case-by-case assessment in function of the nature of the transfer transaction (full or partial), the amount of losses and DGS contribution under the least cost test. In any case, this possible cost increase for the banking industry would not be compensated by any cost reduction in the DGS contributions, contrary to option 4 where the pooling of funds in EDIS opens this possibility.

Another relevant aspect when assessing costs for the industry is the usage of the SRF versus DGS funds in the Banking Union. Since the SRF is a central fund consisting of pooled contributions by all banks in the Banking Union, its use would trigger replenishment needs spread out over the Banking Union population of banks. DGS funds, in the absence of EDIS, remain national under this policy option meaning that replenishment needs bear on the national banking system in the Member State where the DGS funds were used. From a cost synergy perspective at system level, it is therefore more interesting, in the absence of EDIS, to use SRF funds and, in order to do so more credibly, the DGS could provide a financing bridge to meeting the SRF access condition, as explained in section 6.1.1.2 above.

Regarding the banks’ loss absorbing capacity, smaller and medium-sized banks previously earmarked for liquidation and which would enter the resolution scope due to the PIA changes under this option, would need to comply with a MREL requirement. The MREL target would be calibrated proportionately and in line with the preferred resolution strategy, which for transfer strategies could be lower than for open bank bail-in strategies. This is because the loss absorbing capacity would support a transfer of (a set of) assets, rights and liabilities of a bank to a buyer with a simultaneous market exit of the former and not a full restructuring and recapitalisation to allow the bank to continue to operate in the market on a standalone basis.

Looking at the funding equation as a whole and in order to substitute potential public funds injections (frequently observed in the past), the private sources of financing for a bank failure would be a combination of banks’ loss absorption capacity, contributions by RF/SRF and contributions by DGS, where option 2 would have the potential to marginally improve the balance among the elements (resolution scope and funding) and enhance economic efficiency of the funding equation though not at a zero net cost for the industry (compared to the baseline).

6.1.1.6. Assessment of Option 2

Benefits

The main benefit of option 2 would be a relative expansion of the scope of resolution to include smaller/medium-sized banks by slightly increasing the availability of funding solutions for some specific resolution strategies leading to market exit. This option would ensure a more flexible and harmonised use of DGS funds thanks to changes in the hierarchy of claims and harmonisation of the least cost test and increasing the proportionality when accessing the RF/SRF in resolution, under specific conditions and safeguards. These changes to the funding equation would make transfer strategies 96 easier and more credible to plan and implement than under the baseline, contributing to the orderly handling of failed banks and ensuring their market exit without impacts on financial stability or depositor protection while reducing the recourse to public funds. In terms of access to external funding, this option would indeed lower to some extent the recourse to public funds, as banks’ loss absorbing capacity complemented, where needed, by industry-funded safety nets would be used instead to fund more resolution actions for more banks under the harmonised framework. 

These changes are also likely to increase the convergence in resolution practices, legal certainty, level playing field and simplify and standardise the access conditions to DGS funds (through a harmonised least cost test and clearer conditions for a contribution to preventive measures). The review of certain DGSD aspects (see section 6.3) and the legislative changes concerning the PIA leading to an increased application of resolution tools would also improve depositor confidence and preserve a continuous access of depositors to their accounts, which can be particularly important in EU’s increasingly digitalised economies.

Moreover, enabling the application of resolution tools such as transfer tools on a broader scale and the related funding could be conducive to further financial stability and cross-border market integration.

Costs

The main drawback of this option is the untapped potential expansion of the resolution scope because of an insufficiently effective improvement in the funding equation. This may impact the efficiency and effectiveness of the framework and may not provide an optimal solution to address some of the issues identified in Chapter 2. Implementing option 2 requires indeed similar legal amendments as foreseen under option 3, but with more modest effects in terms of outcomes, implying therefore comparatively higher adjustment costs for resolution authorities when assessed against results. Option 2 would yield a lower probability of PIA expansion for the same number of banks and a lower amount of DGS funds unlocked under the least cost test for measures other than the payout of covered deposits in insolvency, than options 3 and 4 (i.e. as shown in Annex 7, a two-tier depositor preference would deliver a lower total amount of DGS funds that could contribute for a smaller number of banks to fund resolution or alternative measures than under a single-tier depositor preference analysed in option 3).

A consequence of a broader use of DGS funds for interventions other than payout of covered depositors in insolvency (depending also on the needs to access the RF/SRF and protected by safeguards such as the least cost test and the two-tier depositor preference) is a risk of shortfall in national DGS funds. Without EDIS, the probability of DGS shortfalls ranges from 20.7% to 56% depending on the severity of the simulated crisis 97 and independently of a possible CMDI impact compounding the risk of shortfalls in national DGSs. These shortfalls could be mitigated through extraordinary contributions by the banking industry or lending from other DGSs. DGS shortfalls could also be mitigated through lending from the market, or recourse to public funds; however the latter would reinforce the bank-sovereign nexus. DGS’ vulnerability to large shocks may also impair depositor confidence in the banking sector. In addition, the limited potential for cost synergies for banks (e.g. diversification and compensation effects leading potentially to a lower target level or contributions) would not materialise in this option.

Option 2 would also require additional coordination and consultation between resolution and DGS authorities. The DGS intervention to bridge the gap to 8% TLOF to access to the RF/SRF would require additional preparation. However, despite more preparation work, such a mechanism would ensure broader access to resolution funding for smaller/medium-sized banks and address to some extent the funding-related problems identified, slightly reducing costs in other areas (taxpayer money, loss of franchise value and loss of depositor confidence).

In addition, placing more banks in resolution than under the baseline option entails a requirement for them to ensure adequate levels of internal loss absorbing capacity (MREL) to allow for the execution of resolution strategies (bail-in or transfer strategies). The MREL requirement is bank-specific, proportionate to the chosen resolution strategy and it may be complied with own funds and eligible liabilities. It is impossible to estimate ex ante, whether such a policy change would lead to a need for banks to issue additional MREL capacity, mainly due to two factors: (i) the level of bank-specific MREL targets that resolution authorities would set for banks entering the resolution scope needs case by case calibration and cannot be estimated in advance and (ii) the starting point in terms of outstanding stock of MREL eligible instruments that each bank holds combined with the level of the requirement determines the issuances needs of each bank which cannot be estimated in advance 98 . Nevertheless, it should be recalled that, in line with the fundamental objectives of the CMDI, the first line of defence in case of bank distress, should always be the banks’ internal loss absorption capacity. A mitigating factor for failing banks would be avoiding the bail-in of depositors and preserving asset value by using the safety nets in case the MREL capacity were not sufficient to support the resolution action, subject to safeguards.

Moreover, banks entering the scope of resolution for the first time would also be subject to the obligation to enhance recovery plans, provide information to resolution authorities on a more frequent basis for the preparation of more extensive resolution plans and ensure they become resolvable. While this would also involve additional costs for banks, these are estimated to be marginal, because banks earmarked for liquidation already report data to resolution authorities who prepare resolution plans albeit on a less frequent basis (simplified obligations). Banks entering the resolution scope would also need to invest in projects to become more resolvable (i.e. enhancing their management information systems, valuation capabilities, revising contracts to assure resolution stays with counterparts, other projects related to the organisation structure and separability).

The benefits of improving preparedness and resolvability of banks in case of failure would increase the chances of preserving financial stability and taxpayer funds and exceed such costs.

Finally, increasing depositor preference, by rendering all deposits senior to ordinary unsecured debt (be it through a two-tier depositor ranking or a single-tier depositor ranking under options 3 and 4) has the potential to lead to marginally higher issuance costs for ordinary unsecured debt (and by extent to marginally higher funding costs for banks) by reducing their potential recovery prospects in the event of a bank’s insolvency. However, this pricing impact is not supported by empirical evidence 99 . Moreover, any potential marginal cost impact must be weighed against the added benefits that depositor preference brings in terms of enforcing market discipline on financial investors to monitor banks’ risks more closely, once their expectation that they will be bailed-in (instead of being bailed-out under a less effective CMDI framework) becomes more credible.

Overall assessment

Effectiveness, efficiency and coherence: Under option 2, the slightly broader use of resolution tools thanks to a slightly improved access to funding for more banks (compared to the baseline option) would enhance financial stability and decrease to some extent the recourse to taxpayer money, however not to the full potential that a more comprehensive CMDI reform could achieve (as described under option 3 or 4). Critical functions for the society (e.g. deposit taking, lending, payments) and the franchise asset value of failing institutions would be better maintained by applying resolution tools more broadly than today and enabling the more extensive use of industry-funded safety nets such as the RF/SRF and DGS funds, subject to the minimum 8% TLOF bail-in access condition and the least cost test safeguard respectively. However, the relatively moderate increase in the scope of resolution (see PIA section 6.1.1.1) correlated with a slight improvement in accessing DGS funds through the implementation of a two-tier depositor preference in the hierarchy of claims and the use of DGS funds to fill the gap in accessing the RF/SRF, would still maintain a higher degree of uncertainty and potential divergences in the application of the PIA than under other options. The absence of EDIS would also render it less effective in ensuring depositor protection and sufficient liquidity in case of DGS funding shortfalls, contributing therefore comparatively less than option 4 to protecting taxpayer funds and breaking the bank-sovereign nexus. Moreover, absent EDIS, the potential for cost synergies through lower contributions to the RF/SRF and DGS funds by the industry would not materialise (unlike in option 4). On the contrary, some banks may face increased costs (potentially raising MREL eligible instruments, ex post replenishment needs for the safety nets as well as the obligation to enhance their recovery plans and become more resolvable because of broadening the resolution scope) which may be passed-through, to some extent, to customers.

Stakeholder views and political considerations: The majority of Member States favouring a strong CMDI reform could consider this option as sub-optimal because of the untapped potential for broadening the scope of resolution supported by a more ambitious revision of the funding equation, in particular the harmonisation of the depositor preference. One Member State is reluctant to facilitate the usage of industry-funded safety nets in resolution (RF/SRF) for non-systemic banks and, in this context, favours handling the failure of smaller/medium-sized banks at national level and with national DGS funds rather than under the harmonised framework. Depositors in particular would greatly benefit from solutions that avoid inflicting losses on them and ensure their uninterrupted access to their accounts 100 . They may therefore regard this option as sub-optimal because the resolution scope would not be expanded to its full potential, meaning that some deposits may still be on the line to bear losses when applying resolution tools.

Regarding the industry, the majority of stakeholders from both big and small/medium sized banks see merit in targeted amendments of the framework to improve its practical application, in particular views converge on the need to improve the predictability and transparency of the PIA assessment and to avoid paying additional contributions into industry funded safety nets. However, views of some small and large banks diverge on the need to broaden the scope of resolution. On one hand, some smaller/medium-sized banks, in particular cooperatives and savings banks 101 may prefer to stay outside the scope of resolution to avoid costs related to additional requirements (MREL, reporting obligations to resolution authorities for resolution planning and MREL calibration, increased scrutiny by markets) or possible ex post contributions to the safety nets (RF/SRF or DGS). Many large banks, on the other hand, are supportive of bringing more smaller/medium sized banks into the resolution scope, regardless of their size and country of origin, and enhancing the credibility, predictability and consistency of the framework as well as level playing field in the single market. Large banks also support minimising risks to taxpayer money and minimising moral hazard by ensuring a use of internal resolution buffers and a consistent and careful approach across the EU for the use of industry funded safety nets subject to a harmonised least cost test, supporting market discipline and avoiding competitive distortions. On the other hand, they are critical of the prospect of paying additional contributions into the safety nets, if these were to be used more frequently to handle the failure of more small/mid-sized banks 102 .

Winners and losers: Reduced risks to financial stability through a potentially slightly broader application of resolution tools under this option would benefit taxpayers and depositors. Depositors, including individuals and SMEs, would be better off than under the baseline option due to continued access to their deposits and the continuity of the bank’s critical functions through more extensive use of resolution and thanks to a more effective use of DGS resources in general. This impact, however, would be limited to the resources available in the DGS until there is progress on EDIS and would be less certain than under options 3 and 4 where the expansion of resolution is broader given a positive presumption of public interest and hence resolution.

Resolution authorities are also winners in this option. They would benefit from legal clarifications of the PIA and more consistent rules on access to funding in resolution and insolvency. This would reduce their risk of legal challenge. The increased access to funding in resolution for transfer strategies would permit them to confidently take positive PIA decisions and facilitate their implementation, although this would imply additional work in improving the planning of such strategies.

The impact on the DGS funds and consequently on banks’ contributions is twofold. On the one hand, DGS funds could be used more frequently than under the baseline if cheaper than paying out covered deposits in insolvency (thanks to harmonising the hierarchy of claims by implementing a two-tier depositor preference which facilitates meeting the least cost test, although not as much as under a single-tier preference explored under option 3), potentially increasing the need to replenish depleted DGSs on the basis of industry contributions. On the other hand, such an impact could be mitigated by a broader use of transfer strategies, increasing the cost efficiency of DGS interventions, and better preserving DGS available financial means, compared to a more costly payout in insolvency 103 .

As originally intended by the framework but not observed in its application to date (see evaluation), banks’ senior creditors 104 would likely be losers under option 2, as they could bear relatively more losses if more banks are put in resolution upon failing. In this context, option 2, when compared to the baseline, may transfer some benefits from banks’ creditors back to taxpayers, depositors and the society. Importantly, enabling access to resolution financing by using the DGS fund for transfer strategies would not discriminate against banks with open bank bail-in strategy because the latter would be recapitalised, restructured and continue their operations, while banks under transfer strategies would need to exit the market as a condition for the more proportionate funding access.

6.1.2.Option 3 – Substantially improved resolution funding and commensurate resolution scope

Option 3 envisages reviewing certain elements of the CMDI framework (BRRD/SRMR, DGSD) achieving a robust reform of the funding equation, which would facilitate a more credible and significant expansion of the resolution scope to more smaller and medium-sized banks whose failure may not be handled in insolvency without consequence on financial stability, taxpayer money and depositor protection. This option is designed to deliver a broader use of resolution tools supported by a more substantial access to funding than under option 2, but not as broad as under option 4 where EDIS as a common central fund would act as a backstop to the national DGS funds.

6.1.2.1. Public interest assessment

Legislative amendments to the PIA under this option (in line with option 2) would include regional economic considerations in the assessment of critical functions and financial stability implications, the need to preserve DGS resources and the possible granting of State aid in insolvency as part of the considerations on the resolution objectives 105 . Importantly and differently from option 2, the legislative amendments to the PIA would also clarify that national insolvency proceedings should be selected as the preferred strategy only when they achieve the framework’s objectives better than resolution (as oppose to achieving them in the same manner, as under the baseline and option 2), leading to an increased prevalence to put banks in resolution, as the resolution authorities would face a slightly increased burden of proof to place banks in insolvency. Nevertheless, the PIA decision will remain at the discretion of the resolution authority on a case-by-case basis. The outcome, in terms of expanding the resolution scope under option 3, would be less ambitious than under option 4, where the inclusion of EDIS in the funding solution would allow an even larger scope to apply resolution and a general presumption of positive PIA. As also mentioned under other options, the number of additional banks channelled through resolution under this option cannot be estimated upfront as the PIA remains a case-by-case assessment by resolution authorities. However, the strengthening of the PIA provisions in the legislation coupled with credible funding in resolution are likely to allow a significant broadening of resolution application.

6.1.2.2. Conditions to access industry-funded safety nets

From the perspective of improving access to funding in resolution, the adjustments to access criteria under this option would be the same as under options 2 and 4, i.e. implementing the possibility to use DGS funds as a bridge to meet 8% TLOF and reach the RF/SRF for transfer strategies with market exit in order to avoid imposing losses on deposits, where that is desired on financial stability grounds. The key distinction in the funding solution between options 2 and 3 is the amount of DGS funds made available for potential interventions outside the payout event, in particular resolution strategies leading to market exit (see section 6.1.2.4 for the corresponding change to the hierarchy of claims envisaged). This more ambitious reform to the funding solution in resolution is matched by a more ambitious expansion of the resolution scope.

6.1.2.3. Use of DGS funds

Under Option 3, DGS funds would contribute to the payout of covered deposits, preventive, resolution and alternative measures under insolvency proceedings. Access conditions would be clarified in the same way as under option 2.

These adjustments would address the problem of unclear and inconsistent rules in accessing DGS funding, contributing to improved level playing field also delivering clearer rules leading to more legal certainty (e.g. the least cost test).

6.1.2.4. Harmonisation of depositor preference in the hierarchy of claims: single-tier depositor preference

Option 3 explores a harmonisation of the ranking of deposits in the hierarchy of claims through a single-tier depositor preference and by removing the super-preference of covered depositors and the DGS in the hierarchy of claims 106 . This entails two changes being introduced in the BRRD. First, as under option 2, the legal preference at EU level would be extended to include all deposits (general depositor preference), meaning that all deposits, including eligible deposits of large corporates and excluded (uninsured) deposits 107 , would rank above ordinary senior unsecured claims. Second, the existing different relative ranking of deposits (i.e. the current three-tier approach) would be replaced by a single ranking, whereby all deposits rank at the same level (i.e. pari passu) amongst themselves (single-tier approach). Annex 7 further describes the different depositor preference scenarios assessed, varying in scope and relative ranking among deposits.

Annexes 7 and 8 (section 2) provide evidence that the general depositor preference with a single-tier ranking would best address the objective of the revised framework, because it would: (i) protect deposits in resolution by reducing the amount that would be otherwise bailed-in to reach 8% TLOF and access the RF/SRF; (ii) maintain intact the protection enjoyed by covered deposits which does not depend on their ranking and (iii) unlock the largest amounts of funds that the DGS could contribute to measures other than the payout of covered deposits under the least cost test, which is critical for facilitating more cost-efficient interventions by the DGS, as proposed under this option. It should also be acknowledged that, by placing non-covered non-preferred deposits (e.g. deposits of large corporates) on the same ranking as covered and preferred deposits (deposits of households and SMEs) and facilitating the use of the DGS bridge, banks would need to replenish the DGS funds to protect not only covered and preferred deposits, but also deposits of large corporates in the context of a transfer strategy. While it may expose the DGS industry-funded safety nets to more frequent contributions by the banks, it would reduce the likelihood and extent of recourse to taxpayer money, improve financial stability and depositor protection and safeguard the financial means of the DGS to a greater extent than a payout of covered deposits in insolvency.

As highlighted in Annex 7 (section 4.1.3), a comparative analysis of depositor preference scenarios showed that the single-tier preference would best shield deposits from bearing losses by reducing most significantly the number of banks where deposits would be impacted when reaching 8% TLOF, from 96 banks in the baseline scenario to 48 (out of 368 banks in total), reducing the value of impacted deposits from EUR 18.3 bn in the baseline to EUR 6.4 bn and unlocking on aggregate up to 20 times more funds for DGS contributions under the least cost test (EUR 0.98 bn) than under the baseline or the alternative scenarios retaining the super-preference of DGS (EUR 0.05 bn). Under the single-tier preference, the DGS intervention under the least cost test would be sufficient to bridge the gap towards 8% TLOF in 76% of cases when considering the entire sample and in 88% of cases when considering only banks with resolution strategy 108 , 109 .

The analysis shows that some deposits in a number of banks would not be shielded from losses in case the 8% TLOF needs to be met. In view of a greater protection of deposits, alternatives solutions for certain tail scenarios may be explored. For instance, should the DGS support not be sufficient or not be able to intervene due to the least cost test to cover the gap between the assets and the deposits transferred 110 , the RF/SRF might provide additional financial support (irrespective of whether the 8% TLOF has been reached or not), when justified based on financial stability grounds or other exceptional circumstances. However, this additional flexibility was discarded as the 8% TLOF access condition to the resolution fund is generally perceived as a critical safeguard against moral hazard.

Regarding the argument of cost-efficiency associated with the use of DGS funds in resolution or alternative measures versus the cost of a payout of covered deposits, an ECB report on DGS alternative measures 111 shows that 261 banks, banking groups or hosted subsidiaries in the Banking Union could individually deplete their fully-filled DGSs with a single payout of covered deposits in insolvency. While 129 of these banks are significant institutions likely to involve resolution rather than a depositor payout in insolvency, the 132 remaining are less significant institutions or their hosted subsidiaries, which also have covered deposits exceeding the target level of their DGSs.

6.1.2.5.Use of industry-funded safety nets and cost synergies for banks

The nature of the impacts on banks and industry-funded safety nets, and the potential cost synergies related to these are the same as described under option 2. The main distinction under option 3 is the intensity of these impacts. Since the access to funding from DGS would be facilitated more substantially under this option (as a result of the single-tier depositor preference in the hierarchy of claims), DGS replenishment needs via ex post industry contributions could be higher. However, this potential higher cost for the industry would be counter-balanced by the following effects: (i) increased depositor protection including for non-covered deposits, which could facilitate more effective and efficient transfer strategies (restructuring and market exit) thereby fostering competitiveness for the sector; (ii) increased financial stability through credible financing of transfer tools in resolution or alternative measures for more failing banks in a credible manner, preserving asset value, reducing contagion and ensuring the continuation of client relationship, and (iii) reduced recourse to taxpayer funds while synergies between RF/SRF and DGS would be more efficiently combined, in particular in the Banking Union where the SRF and DGSs do not have the same base for the bank contributions. The combined use of the safety nets would enhance the resilience of the industry-funded source of funding available for bank failures and, to some extent, reduce the procyclicality of ex post contributions bearing on the sector 112 .

However, foregoing the pooling effects that the implementation of EDIS could have brought, this option would not result in savings related to lower safety net contributions by the banking sector (see option 4). Therefore, the combined target level contributions for DGSs would remain as under the baseline option (0.8% of covered deposits).

6.1.2.6. Assessment of Option 3

Benefits

Option 3 would broaden the application of the EU harmonised framework for resolution to more smaller/medium-sized banks on the back of more ambitious improvements in the funding solution. The legal clarification of the PIA would deliver a broad application of resolution tools. Legal clarity and level playing field would be significantly enhanced and the uncertainty regarding the handling of smaller and medium sized banks through diverging national solutions greatly reduced. The problems identified in the current framework regarding the difficulty to access funding sources and the broad discretion when deciding whether to place a bank in resolution or insolvency, would be addressed to a large extent. A more extensive use of resolution underpinned by a mechanism to improve access to the DGS and resolution funding, while meeting the 8% TLOF minimum bail-in condition, would limit further the recourse to public funds and enhance financial stability. At the same time, allowing DGS funds to bridge the gap to access the RF/SRF would introduce more proportionality for smaller/medium-sized banks under transfer strategies in accessing safety nets without weakening the minimum bail-in condition to access the RF/SRF. Implementing a single-tier depositor preference would shield more depositors from taking losses and enable more DGS funds’ contribution to finance transfer tools in resolution or alternative measures under the least cost test. This would de facto provide more scope for DGS funding interventions for a larger population of banks than under the baseline and option 2, to either facilitate transfer transactions directly or help bridge the gap to meet the access condition of RF/SRF (provided market exit as a safeguard is observed).

The implementation of option 3 would strengthen the level playing field in the EU, improve legal certainty and predictability, and make the CMDI framework more incentive-compatible across all possible interventions available in the toolbox, whether they are embedded in the harmonised framework (BRRD/DGSD) or available under national insolvency procedure. Similarly to the other options, option 3 would facilitate the use of DGS funds in resolution, but also better frame interventions outside resolution such as preventive and alternative measures by clarifying access conditions (least cost test), leading to more standardisation, transparency, predictability of rules and an equitable treatment of depositors, creditors and taxpayers across the EU.

Option 3 would deliver tangible benefits to resolution authorities by increasing the legal certainty of the framework and providing them with stronger financing solutions to credibly handle bank failures. It would also enhance depositor protection and a more efficient use of industry funds, whose main purpose is to finance crisis management measures. Additionally, enabling and significantly strengthening the funding of resolution strategies, such as transfer tools, would be conducive to further cross-border market integration and consolidation.

Costs

The nature of the costs assessed under option 2 would largely remain valid under option 3, with the distinction that some costs under option 3 may be somewhat higher or applicable to more banks, while at the same time comparatively delivering greater benefits (see above). These costs, as already explained under option 2, include: (i) potential additional replenishment needs by the industry without benefiting from lower contributions (in the absence of EDIS), (ii) risks of shortfalls in national DGS funds, which may require borrowing (from other DGSs or the market) or for a backstop by the sovereign, reinforcing the bank-sovereign nexus, (iii) additional coordination efforts between resolution and DGSs authorities, (iv) the need for banks earmarked for resolution due to the changes to the PIA to raise the required levels of MREL and (v) costs related to marginal reporting needs by banks entering the resolution scope for the first time.

A more substantial improvement in accessing industry-funded safety nets (RF/SRF and DGS funds), both in terms of higher amounts unlocked and for a larger population of banks (thanks to the single-tier depositor preference), may increase the risk of shortfalls in national DGS funds. Without EDIS, these shortfalls could be mitigated through extraordinary contributions by the banking industry, which may lead to pass-through costs effects from banks to their customers. DGS shortfalls could also be mitigated by lending from other DGSs, lending from the market or recourse to public funds. However, the latter would reinforce the bank-sovereign nexus. As under option 2, in the absence of EDIS, cost synergies for the industry in the form of reduced contributions to safety nets would not materialise and DGS’ vulnerability to large shocks may continue to impair depositor confidence in the banking sector.

The implementation of this option would also require additional coordination among resolution and DGS authorities when using the DGS fund to reach the resolution fund. It would also imply additional tasks for resolution authorities to prepare additional resolution plans and set bank-specific MREL requirements due to the extension of the PIA. However, these costs would be mitigated by the benefits of using the framework as intended and ensure the market exit of failing banks without consequences on financial stability.

This option would also impact banks through the requirement to ensure adequate levels of internal loss absorbing capacity to allow for the execution of resolution strategies (bail-in or transfer strategies) and investing in projects to become more resolvable (i.e. enhancing their management information systems, valuation capabilities, revising contracts to assure resolution stays with counterparts, other projects related to the organisation structure and separability). However, whether new MREL requirements would translate into higher costs is a case-by-case assessment that cannot be estimated upfront, depending on the required MREL targets, the outstanding stock of eligible instruments that banks already hold as well as on bank individual features and market conditions. A mitigating factor for banks would be avoiding the loss of franchise value and the continuation of critical functions via a transfer to a buyer, avoiding the bail-in of depositors by using DGS to fill the gap towards accessing resolution funding, in case MREL capacity were not sufficient to support the resolution action, subject to safeguards.

While option 3 would address to a larger extent than option 2 the problems identified in chapter 2, it should be acknowledged, however, that the resolution scope and necessary funding may not be secured in all cases under this option due to remaining discretion and the inherent limitations in the conditions to access funding (least cost test) 113 . As a consequence, the problem of insufficient legal certainty and predictability may not always be fully addressed and there may be some residual uncertainty in the treatment of certain bank liability holders in the event of a bank failure.

Overall assessment

Effectiveness, efficiency and coherence: Under option 3, the broadening of the resolution scope would be achieved with increased legal certainty and mirror the increased availability in funding. It would materially tackle the problem of level playing field, convergence in practices and use of public funds to manage failing banks, unlike the baseline or option 2 which would deliver a weaker reform in the same direction. Providing the funding and the PIA legal clarity to place more smaller/medium-sized banks in resolution would contribute to improving financial stability, depositor protection, limiting contagion and preserving critical functions in banking compared to the baseline and option 2, however to a lesser extent than under Option 4 where EDIS would significantly reinforce the funding equation. In this context, the issues related to the existing room for arbitrage and lack of clarity and predictability in the application of crisis management tools, as identified in Chapter 2, would be largely resolved, despite some residual risks that may remain due to certain inherent limitations in the access to funds (least cost test) and the remaining discretion. The possibility to use the DGS funds as a bridge to access the RF/SRF if conditions are met would require enhanced coordination between the SRB and national DGS authorities. However, this does not imply any change in governance. As explained above, the reforms envisaged in option 3 would entail certain costs, which would be outweighed by the benefits brought by the improvements to the framework in terms of financial stability, depositor protection, level playing field and taxpayer money.

The policy option package 3 (as well as 2) is assessed against the background of the 2015 EDIS proposal under the assumption that political negotiations remain on hold. However, option 3 is neutral but open to the introduction of EDIS at a later stage. Within the Banking Union, the establishment of EDIS (whatever the design), would enhance the effectiveness and efficiency of the framework under this option, as the firepower of deposit guarantee schemes to contribute to transfer strategies would increase, and with EDIS in place, there would be a better alignment between the level of the decision taking (EU or national) and the responsibility related to financing.

Stakeholder views and political considerations: The reform proposed under option 3 is fully aligned with the vision put forward by the Eurogroup in its statement of 16 June 2022 114 . The Eurogroup in inclusive format agreed on a clarified and harmonised public interest assessment, broader application of resolution tools in crisis management at European and national level, including for smaller and medium-sized banks where the funding needed for effective use of resolution tools is available, notably through MREL and industry-funded safety nets. The Eurogroup also agreed to further harmonise the use of national DGS funds in crisis management, while ensuring appropriate flexibility for facilitating market exit of failing banks in a manner that preserves the value of the bank’s assets. It called for a harmonised least cost test to govern the use of DGS funds outside payout of covered deposits to ensure consistent, credible and predictable outcomes. Given diverging views among Member States on the merits and risks of implementing a single-tier depositor preference, the Eurogroup statement deferred the impact analysis and policy making to the Commission.

While many Member States find the idea of expanding resolution and a more extensive use of the RF/SRF appealing, some remain reluctant to facilitating the access to resolution funding due to concerns related to moral hazard and redistribution effects in case of replenishment needs following a depletion of the SRF in the Banking Union. At the same time, many Member States support the idea of expanding the resolution scope and framing the discretion regarding the PIA, while at the same time integrating more proportionality in the rules to access funding. One Member State is reluctant to facilitate the usage of industry-funded safety nets in resolution (RF/SRF) for non-systemic banks and, in this context, favours handling the failure of smaller/medium-sized banks at national level and with national DGS funds rather than under the harmonised framework.

The European Parliament supports adjustments to the CMDI framework with the goal of ensuring more coherent, credible and effective approaches across all Member States, including facilitating market exit of failing banks to the benefit of financial stability, taxpayers’ protection and depositors’ confidence 115 . In particular, the European Parliament supports a clarification of the PIA criteria, so that the framework is applied in a more consistent and predictable manner. It is also supportive of using DGS funds: (i) to fill the gap towards reaching the minimum bail-in rule (8% TLOF) to access resolution funding for smaller/medium sized banks with a transfer strategy or (ii) to support alternative measures in national insolvency for those banks, subject to a stringent, harmonised least cost test. The European Parliament therefore calls for more clarity on the least-cost principle and to the conditions for the use of DGS funds. It has finally stressed the need to explore a possible alignment of specific aspects of insolvency law for the purpose of aligning incentives and ensuring a level playing field.

The views of the industry, as for all options, are confirming the need to bring forward targeted amendments for improving the practical application of the CMDI framework, in particular with regard to improving the predictability of the PIA assessment. As under all options, on one hand, some smaller/medium-sized banks, in particular cooperatives and savings banks 116 may prefer to stay outside the scope of resolution to avoid costs related to additional requirements (MREL, reporting obligations to resolution authorities for resolution planning and MREL calibration, increased scrutiny by markets) or possible ex post contributions to the safety nets (RF/SRF or DGS). Many large banks, on the other hand, are supportive of bringing more smaller/medium sized banks into the resolution scope, regardless of their size and country of origin, and enhancing the credibility, predictability and consistency of the framework. Large banks also support minimising risks to taxpayer money and minimising moral hazard by ensuring a consistent and careful approach across the EU for the use of industry funded safety nets subject to a harmonised least cost test, supporting market discipline and avoiding competitive distortions. On the other hand, they are critical of the prospect of paying additional contributions into the safety nets, if these were to be used more frequently to handle the failure of more small/mid-sized banks 117 . However, the principle of industry funding (internal absorption capacity and safety nets) absorbing losses in case of distress/failure as opposed to public bail-out would inevitably come as a cost. Overall, the majority of stakeholders agree that resolution and insolvency tools should be applied more consistently, thereby ensuring a better level playing field in the treatment of similar banks across the EU.

In addition, some international institutions 118 acknowledge the more efficient use of funds in resolution rather than through payout in insolvency and the economic inefficiency, at a system level, of having significant funds sitting idle and untapped, while public funds are being employed to handle failures. Also, some industry players acknowledge the need for additional market consolidation in the EU and ensuring that smaller/medium-sized institutions actually exit the market when failing. Depositors, including SMEs, and consumer organisations support the reform proposed under option 3 because it would reduce the need for recourse to taxpayer funds and because they would be shielded to a greater extent from bearing losses in a failure, while industry-funded safety nets would take the second line of defence (after banks’ internal loss absorbing capacity) to cover losses and sustain the financing of the crisis management measures.

Winners and losers: Depositors, including households and SMEs, are likely winners under option 3 by retaining uninterrupted access to their accounts under the assumption of a broader use of resolution tools delivered by legal clarifications in the PIA and enhancement of funding options. Taxpayers would also be better off under this option since banks’ failures would be financed by industry-funded safety nets created for this purpose.

Smaller and medium-sized banks relying on equity and deposits and their clients would essentially be in a better situation if they were to fail, thanks to alternatives to access RF/SRF without bailing-in deposits and a more credible possibility of being transferred to a buyer while preserving their franchise asset value. Alternatively, under national insolvency regimes, they would have to rely on the national DGS funds to transfer the business or payout covered deposits under a liquidation process. However, the banking sector in general may face costs due to potential replenishment needs for DGS and RF/SRF, which would be used more broadly to substitute public funds. Absent any reduction of contributions to the safety nets, option 3 may be more expensive for the banking industry compared to option 4, while providing less benefits in terms of depositor protection and not addressing the bank-sovereign nexus in the absence of EDIS. Option 3 may also be potentially more expensive for the industry than option 2, however it would deliver superior benefits, as explained above. Banks newly subjected to resolution strategy would also need to invest in projects to become more resolvable (negative aspects from a banks’ cost perspective, while a very positive one for financial stability). As under the other options, facilitating the access to resolution financing by using the DGS for banks with transfer strategies aims at ensuring an orderly market exit for such banks and it would not create an undue advantage compared to banks with open bank bail-in strategies, which are meant to be recapitalised and continue their operations post-resolution.

Resolution authorities would be winners under this option, benefiting from additional legal clarity stemming from the PIA legal amendments, a strong toolkit underpinned by more accessible safety nets and more consistent rules on access to funding in resolution and insolvency. Achieving standardisation and transparency thanks to the harmonisation of the least cost test, the reform under option 3 would solve the problem of misaligned incentives when deciding on the type of measures and tools to apply, leading to more convergence, legal certainty and improved level playing field. It would also reduce the authorities’ legal risk (litigations).

Banks’ creditors, and specifically senior ordinary unsecured creditors 119 , would be more exposed to the risk of bearing losses under this option, since the banks in which they hold claims are more likely to be placed in resolution in case of failure than under the baseline and option 2, but to a lesser extent than under option 4. The degree of this impact depends on whether the bank would have a possibility to be restructured under national insolvency law under the current legislation.

6.1.3.Option 4 – Ambitious reform of the CMDI framework including EDIS

Option 4 envisages a review of the CMDI framework coupled with the implementation of EDIS as the third pillar of the Banking Union architecture. However, EDIS as envisaged under option 4 does not correspond to the fully fledged mechanism put forward in the 2015 Commission proposal, which did not make progress in co-legislative negotiations. Instead, it is consistent with a hybrid, intermediate mechanism more recently discussed in inter-governmental format since 2018 (see Annex 10, section 2). While this option was explicitly not endorsed by the Eurogroup, the Commission and many stakeholders continue to underline its importance, pointing that EDIS would make the CMDI framework more robust. The interplay between the CMDI framework and a possible EDIS in the future is important to bear in mind for the conceptual logic and policy design of the review. Therefore, it has been included in this impact assessment for technical completeness and consistency and in sign of acknowledgement of all the political and technical discussions which took place on EDIS in the past years.

6.1.3.1. Public interest assessment

Option 4 would deliver an expansion in the scope of resolution that would exceed in intensity the one under option 3, primarily thanks to a more ambitious funding solution including EDIS as a complementary central industry-funded safety net alongside the SRF in the Banking Union. The more extensive application of resolution, compared to other options, would be achieved through the same legislative amendments as proposed under options 2 and 3 plus loosening, more than under option 3, the burden of proof for resolution authorities to place banks in resolution thanks to a “general positive presumption of public interest”. As also mentioned under other options, the number of additional banks that would go in resolution under this option cannot be estimated upfront, as the PIA remains a case-by-case assessment by resolution authorities. However, the strengthening of the PIA provisions and the presumption of public interest in the legislation are likely to result in a significant broadening of resolution application.

6.1.3.2. Conditions to access industry-funded safety nets

For a credible application of resolution tools on a broad scale, the access to resolution financing is key, especially for smaller/medium-sized banks with a large deposit base, likely to be resolved under transfer strategies. Importantly, as under options 2 and 3, the minimum bail-in requirement of 8% TLOF remains unchanged, to safeguard against moral hazard when using the RF/SRF. However, when deemed important for financial stability, deposits would not be required to cover losses to meet such requirement, if certain conditions are met. More specifically, the DGS/EDIS can intervene to support transfer strategies 120 leading to a market exit and cover losses in lieu of deposits up to the amount determined under the least cost test. This approach as in options 2 and 3 is justified by the need to ensure consistency with the broader approach to the PIA and the expectation that more adequate access to funding in resolution needs to be available for certain strategies.

Extending the scope for resolution combined with the possibility to access funding more broadly and credibly (RF/SRF, DGS/EDIS) would improve legal certainty in applying the PIA, achieve more convergence and level playing field in applying resolution across jurisdictions and, importantly, address the funding issues identified in Chapter 2. Implementing an EDIS central fund as a backstop to the DGS funds would tackle the problem of potential shortfalls in available resources of national DGSs that may be caused by significant shocks, which no other option can credibly tackle without engaging taxpayer funds. As under the other options, the targeted DGS/EDIS contribution to reaching the condition to access RF/SRF for transfer strategies would introduce more proportionality, while at the same time safeguarding against moral hazard by maintaining the minimum condition of 8% TLOF.

6.1.3.3. Use of DGS funds/ EDIS role and governance

Option 4, which is the most ambitious in terms of resolution scope combined with a central fund in EDIS, also aims to address the problem pertaining to unclear rules and access conditions to DGS/EDIS funds per type of intervention, eliminating legal uncertainties. In terms of scope of intervention, support from EDIS would be called for all DGSs functions: payout of covered deposits, preventive measures, contribution in resolution and alternative measures in insolvency. The following clarifications would be made:

·Clarify and harmonise the conditions for financing of preventive measures by DGS/ EDIS contribution;

·Clarify the scope of intervention and least cost tests of DGS/ EDIS in resolution;

·Clarify and harmonise the least cost test for DGS contributions and access conditions to EDIS alternative measures in insolvency;

·EDIS to contribute, as a backstop to the DGS, to the payout of covered deposits in insolvency.

These adjustments would contribute to clearer rules leading to more legal certainty, simplification of the least cost test and eliminating difficulties in its application, enhanced level playing field and address the issue of inconsistent solutions to funding.

Under option 4, with the establishment of EDIS, the governance in the Banking Union would be revised and strengthened. In order to reflect the substantial concentration of resources at central level, a key role for the SRB in the decision-making process concerning the funding measures (including use of DGS/EDIS) would be required under this option. The SRB would therefore be empowered to take decisions in all scenarios where EDIS would need to be tapped. For certain elements of the decision-making process, and particularly the least cost test calculation, the SRB may however still decide to rely on input from national authorities when more specific national considerations are concerned (e.g. the ranking of liabilities at national level or an estimate of the recovery rates for assets).

6.1.3.4. Harmonisation of depositor preference in the hierarchy of claims

Option 4 envisages the implementation of a single-tier depositor preference in the hierarchy of claims and removing the super-priority of DGS/EDIS/covered deposits, as also explained under option 3. The only distinction is that the benefit of implementing a single-tier preference for depositors would also entail facilitating the use of EDIS under the least cost test where necessary as backstop to national DGS funds.

6.1.3.5. Use of industry-funded safety nets and cost synergies for banks with EDIS in place

Option 4 would generate significant synergies between the SRF and EDIS, both in terms of funding structure, liquidity depth and scope of intervention in resolution and insolvency. By design, pooling resources and increasing risk diversification would allow to increase the level of depositor protection, while creating room for lowering the target level and, consequently, reducing the contributions burden for the banking sector. The quantitative analysis 121  demonstrates the possibility to maintain or even increase the current level of depositor protection with a lower target level, even under systemic crisis simulations. The more resources are pooled the higher the potential reduction of contributions would be. For instance, assuming an ambitious pooling, EDIS would significantly lower the probability and the amounts of liquidity shortfall compared to the status quo with a 0.6% target level 122 . The cost savings for the banks in the Banking Union could represent on aggregate EUR 14 bn or 25.5% of total DGS contributions, as estimated based on Q4 2020 data. However, given the risk-based nature of contributions, the cost reduction would not affect all banks to the same extent 123 .

However, if Member States wish to retain and cover the residual national options and discretions (other than preventive and alternative measures) under the DGSD (not fully harmonised), they would be required to finance them with funds above the target level. The current target level of 0.8% of covered deposits would continue to apply in the Member States outside the Banking Union.

6.1.3.6. Assessment of Option 4

Benefits

Option 4 would deliver a decisive step forward towards completing the Banking Union with its third pillar, EDIS. It would be broadening the application of the EU harmonised framework for resolution. In the Banking Union, it would create a central EDIS fund with pooled resources available to handle multiple bank failures, which would enhance the financial stability of participating Member States, strengthen the single market in banking and underpin the Economic and Monetary Union.

The legal clarification of the PIA would deliver a broad application of resolution tools. Legal clarity and level playing field would be significantly enhanced and the uncertainty regarding the handling of smaller and medium sized banks through diverging national solutions greatly reduced. The problems identified in the current framework regarding the robustness of funding sources, the difficulty to access them and the broad discretion when deciding whether to place a bank in resolution or insolvency, would be addressed to a large extent. An extensive use of resolution underpinned by central industry-funded safety nets and a mechanism to improve access the resolution fund while meeting the 8% TLOF would limit further the recourse to public funds and enhance financial stability, weakening the bank-sovereign nexus in the Banking Union.

Improvements to conditions for DGS/EDIS contribution to various interventions other than payout would render the use of DGS/EDIS more efficient when compared to a payout scenario 124 and boost depositor confidence, including due to continued access to their accounts also ensuring level playing field with an equitable treatment of depositors, creditors, taxpayers across the EU. 

At the same time, allowing DGS/EDIS to bridge the gap to access the RF/SRF would introduce more proportionality for smaller/medium-sized banks under transfer strategies without weakening the minimum bail-in condition to access the RF/SRF.

This option would deliver cost synergies for the banking sector through a lower combined target level and related contributions, while providing extensive benefits via the available pooled resources.

Moreover, enabling and significantly strengthening the funding of resolution strategies such as transfer tools would be conducive to further cross-border market integration. It could also contribute to the efficiency of the EU resolution regime by promoting a functional framework able to cater for the failure of smaller/medium-sized banks, as it is the case in other jurisdictions (e.g. US with the Federal Deposit Insurance Corporation). In line with this more centralised use of funding, including when it comes to EDIS, this option proposes a governance structure with a prominent role for the SRB to manage funding for banks under its remit.

Costs

The creation of EDIS would involve set-up costs to pool funds in a central EDIS fund. However, these costs would be likely marginal, when compared to the set-up of the SRM/SRB/SRF in 2015, as the functioning of EDIS would build on already existing and functioning funds (DGS funds and SRF) and established processes, workflows and authorities (national DGS authorities and the SRB). While the set-up costs of this option would be higher than zero, the benefits of available liquidity in case of DGS shortfalls would render the cost-effectiveness of this option comparatively higher than that of other options.

The implementation of this option would also require additional coordination among authorities when using the DGS/EDIS to reach the resolution fund. It would also imply additional tasks for resolution authorities to prepare additional resolution plans and set bank-specific MREL requirements due to the extension of the PIA. However, these costs would be mitigated by the benefits of using the framework as intended and ensure the market exit of failing banks without consequences on financial stability.

This option would also impact banks which would need to comply with the requirement to ensure adequate levels of internal loss absorbing capacity to allow for the execution of resolution strategies (bail-in or transfer strategies) and investing in projects to become more resolvable. However, whether new MREL requirements would translate into higher costs is a case-by-case assessment, depending on the required MREL targets, the outstanding stock of eligible instruments that banks already hold as well as on bank individual features and market conditions. A mitigating factor for banks would be avoiding the bail-in of depositors by using DGS/EDIS to fill the gap towards reaching the minimum bail-in rule (8% TLOF) to access resolution funding for banks with transfer strategy, in case MREL capacity were not sufficient to support the resolution action, subject to safeguards. However, using the DGS/EDIS fund and the RF/SRF would also entail re-couping those funds through ex post contributions from the industry.

Overall assessment

Effectiveness, efficiency and coherence: Option 4 would be a step forward towards completing the Banking Union with its third pillar. It would contribute by design to a greater application of resolution tools than any other option (through legal amendment including a general presumption of positive PIA), also strengthening financial stability, limiting significantly the recourse to taxpayer money, thanks to stronger, more accessible industry-funded central safety nets. This option is the one that would best preserve critical functions and the franchise value of assets in failing banks given the extensive use of resolution. This option would also contribute to better legal clarity and aligned incentives in the choice of applicable procedure (resolution or insolvency) as well as enhancing the EU level playing field. It would boost depositor protection and ensure they are treated equitably, irrespective of their location.

Stakeholder views and political considerations: Given the outcome of the June 2022 Eurogroup and the lack of agreement on a comprehensive roadmap to complete the Banking Union including EDIS, this option is considered politically unfeasible, at least in the current institutional cycle.

In its recent report on Banking Union 125 , the European Parliament has stressed the importance of completing the Banking Union with the establishment of an EDIS, as its third pillar. In particularly, the European Parliament stresses the importance of EDIS, for improving the protection for depositors in the EU and their trust in the banking sector and for reducing the link between banks and sovereigns. However, the Parliament has not yet concluded its first reading of the Commission’s 2015 EDIS proposal.

The potential to place more banks in resolution, benefiting from strong central safety nets and reducing financing costs (i.e. for EDIS in the Banking Union), is appreciated by the banking industry (banks of all sizes and business models), which considers that national DGSs are limited in size and firepower and a fully-fledged EDIS would be an essential piece of the Banking Union architecture. This view is not shared by IPS members, which consider their solidarity model as sufficient to avert failures. Some respondents to the targeted and public consultations 126 underlined that a fully-fledged EDIS would reduce the burden on banks while minimising the probability of a call for ex post contributions, also avoiding pro-cyclical impacts on banks’ balance sheets. However, certain smaller/medium-sized banks which would come into the scope of resolution may need to bear additional obligations to enhance recovery plans, provide more extensive information to resolution authorities for the preparation of resolution plans, ensure compliance with MREL requirements and become more resolvable 127 .

Consumer organisations are supportive of a centralised deposit insurance scheme 128 to ensure a uniform level of depositor protection and reinforce consumer confidence. Consumers support any solution that limits the use of public money to rescue failing banks. They would however prefer solutions where capital requirements for banks would be increased, and State aid in liquidation proceedings and of precautionary support would be subject to a stricter test 129 .

Winners and losers: Taxpayers, depositors and Member States would benefit greatly from an improved and more proportionate CMDI framework with a strong EDIS in the Banking Union. Such a framework, given the expected application of resolution and the improved functioning of measures outside of resolution, would significantly reduce risks for financial stability, and would preserve banking critical functions for the society. The reduced recourse to public funds and the corresponding increased use of industry-funded safety nets (RF/SRF, DGS/EDIS) would have a positive impact on weakening the bank-sovereign nexus. More depositors would be likely better off than under other options, due to continued access to their deposits and depositor protection thanks to a robust EDIS in the Banking Union. Such a construction may also increase the appeal of the Banking Union with non-participating Member States, paving the way towards a more integrated and centralised single market in banking.

Smaller and medium-sized banks relying on equity and deposits, which are generally candidates for transfer strategies, and their shareholders, creditors and employees would also benefit from more proportionality by being able to access the RF/SRF more easily, without the need to systematically inflict losses on depositors. Such banks would be able to access the RF/SRF through DGS contributions under the least cost test, while being subject to safeguards (e.g. market exit if they fail). However, the smaller and medium-sized banks subject to an extended PIA would also need to comply with MREL requirements in line with the resolution strategy and invest in projects to become more resolvable (negative aspects from a banks’ cost perspective, while a very positive one for financial stability). As under the other options, facilitating the access to resolution financing by using the DGS for banks with transfer strategies aims at ensuring an orderly market exit for such banks and it would not create an undue advantage compared to banks with open bank bail-in strategies, which are meant to be recapitalised and continue their operations post-resolution.

Resolution authorities would be winners under this option (even more so than under other options), benefiting from a strong toolkit underpinned by robust safety nets in the Banking Union and more consistent rules on access to funding in resolution and insolvency. This option would achieve more convergence and legal certainty in the application of rules, leading to improved level playing field. It would also reduce the authorities’ legal risk (litigations).

Banks’ creditors, and specifically senior bond holders, would be more exposed to the risk of bearing losses since the banks in which they hold claims are more likely to be placed in resolution in case of failure than under the baseline and other options. The degree of this impact depends on whether the bank would have a possibility to be restructured under national insolvency law under the current legislation.

6.2.Comparison and choice of preferred options

Table 1 provides a high-level summary of how the previously-described options compare (for the sake of readability of the tables, the labels of the options have been shortened).

Table 1: Summary of how the options compare

Magnitude of impact as compared with the baseline scenario (the baseline is indicated as 0): +++ very positive; ++ positive; + slightly positive; +/- mixed effect; 0 no effect; – slightly negative; -- negative; --- very negative.

Leaving aside option 4 which, although technically the most robust option, is not politically feasible at this stage, option 3 would, on balance, deliver solutions to most problems identified in chapter 2. It is therefore considered to be the preferred option.

In particular, in terms of effectiveness, option 3 would deliver a crisis management reform contributing comparatively more than other options to strengthening financial stability, while facilitating market exit of failing banks. It would likely reduce the recourse to public funds by creating the funding conditions to handle more failures of smaller/medium-sized banks in the CMDI framework, using industry-funded safety nets. Increased access to funding in resolution or for alternative measures would open the possibility of shielding depositors from bearing losses, maintaining the client relationship and the franchise value of assets by creating room for a successful transfer of failing banks. Option 3 would also improve the legal clarity and predictability of the framework by standardising and harmonising the access condition to DGS funds for all contributions other than payout of covered deposit, ensuring incentive compatibility among the various measures (preventive, resolution, alternative measures in insolvency) that could be used to handle bank failures.

In terms of cost-efficiency, option 3 would deliver benefits exceeding its costs by ensuring that already established industry-funded safety nets could be used more broadly and in a more efficient manner 130 . Additional obligations on banks generated through this reform would be mitigated by increased societal benefits, through protecting financial stability and taxpayer money, more market consolidation and transferring the benefits from banks’ creditors to depositors and taxpayers. In comparison, option 4 would deliver more cost synergies to the industry through reductions of contributions to EDIS, thanks to the pooling effects that a central fund would create. However, in option 3 (as in option 2), the potential increase in costs for banks due to calls to replenish depleted safety nets, requirements to build-up loss absorbing capacity and other additional requirements, which come with having a resolution strategy (e.g. reporting, becoming more resolvable), would not be balanced by any cost reduction in contributions to the safety nets under this option.

In terms of coherence, all option packages, including option 3 have been designed with internal coherence among the various elements in mind (e.g. ambition on the PIA expansion matched by funding solutions).

The changes envisaged under option 2 go into the same direction as the ones described for option 3, however they would deliver a less extensive reform and, as a result, achieve a less effective outcome in terms of the objectives of the framework. This is mainly due to a less effective outcome in terms of potentially unlocking DGS funds as a result of implementing a two-tier depositor preference as opposed to a single-tier depositor preference as envisaged under option 3, which may limit the potential to place more banks in resolution. The overall costs of option 2 may be somewhat lower than in option 3, but so are the benefits delivered, i.e. a narrower scope to broaden resolution matched by a narrower increase in funding, as explained in the respective sections in Chapter 6.

When ranking the effectiveness of the various reform options envisaged and measured in terms of PIA scope, access to industry funding and depositor protection, the benefits delivered under option 2 would improve the current framework (baseline) less significantly. Option 3 would make a more substantial impact than option 2. Based on the sample analysed in Annex 7, section 4.1.3, the funding unlocked under option 3 would be 20 times higher than under the baseline, while it would be five times higher than under option 2. In this regard, option 3 would lead to an increased protection of taxpayer money and depositors, although it would also come at a potentially higher cost for the banking sector.

6.3.Common elements across the packages of options

This section provides an assessment of additional policy changes envisaged to enhance depositor protection and which are common across all packages of options. The remaining common elements across all packages of options (early intervention measures, timing of FOLF trigger, interaction between FOLF and insolvency triggers) listed in section 5.5 are of a more technical nature and presented in Annex 8.

Depositor protection

As observed in the four EBA opinions, the consistency of depositor protection in the EU needs to be improved across all options 131 . In addition to the current standard protection of EUR 100 000 per depositor per bank applicable across the EU, more convergence focusing on specific depositors (i.e. public authorities) or types of deposits (i.e. client funds of financial institutions, so-called temporary high balances) would contribute to a more equal treatment of depositors across the EU. The organisation of depositor payouts, addressing various situations involving money-laundering concerns in a cross-border context, or specific elements of information disclosure would also benefit from improvements. Having regard to the increasing volume of cross-border and Fintech services 132 , these improvements would also help depositors navigate the different legal regimes to claim the repayment of their deposits in other Member States.

Key areas for further improvements are:

-Eligibility for depositor protection (e.g. public authorities);

-DGS payout processes (prescription timelines, determination of repayable amount, set off);

-Specific improvements to information disclosure for depositors;

-Cooperation between DGSs (reimbursements in host Member States, passported services and transfers of contributions in the event of changes to DGS affiliation);

-DGS funding (definition of available financial means, use of funding sources);

-More convergence in the application of national options and discretions, e.g. temporary high balances, third country branches;

-The treatment of client funds held by non-bank financial institutions.

7.Preferred option

The packages of policy options outlined above would all provide an improvement to the status quo. All of them address, to some extent, some of the core issues identified in the problem definition and follow a similar direction. In particular, they would allow (to various degrees) a more extensive application of resolution, more proportionate and consistent access to funding sources in resolution and outside, and incentivise a more extensive use of the sources of financing which are funded by the industry (resolution fund, DGS) as a possible complement to the internal loss absorption capacity of the bank concerned. This would foster financial stability, depositor protection and limit recourse to taxpayers’ funds. As an important distinguishing element, option 4 would also implement EDIS as a central fund 134 , which would backstop the national DGS funds and reduce the link between banks and sovereigns, which cannot be achieved under the other options. Although option 4 would be an important step towards completing the Banking Union, it cannot be implemented politically at this point in time.

All the options provide improvements with respect to the legal certainty and predictability in the management of bank failures. In particular, the clarifications to important provisions such as the harmonisation of the least cost test contribute to clarifying and resolving certain interpretive issues which have led to uncertainty in the application of the framework.

In the same vein, the proposed clarifications to some elements of the toolbox (detailed in section 6.3 of Chapter 6 and in Annex 8) which are important to ensure early action before the bank’s failure (early intervention measures, preventive DGSD measures, BRRD precautionary measures) are effective in ensuring a better framed and more consistent use of these tools. Additionally, clarifications regarding advancing the timeliness of resolution action (by ensuring an adequately early FOLF triggering) would bring significant net societal benefits in terms of cost minimisation. While there may be limitations to the degree of ambition for advancing the determination in time of a bank as FOLF 135 , the earlier this determination is made, the more resources (capital, liquidity) are available in the failing bank to facilitate the execution of a successful resolution action with potentially less need to impose losses on deposits. Finally, clarifications to the FOLF triggers and their coordination with triggers for insolvency (see Annex 8) would improve clarity with respect to the need for a swift exit of a failing bank from the market when there is no public interest in resolution. This in turn reduces the burden for authorities and banks in ensuring compliance with the legislative provisions. Since many of these amendments and clarifications are common to all options, it can be concluded that they all equally achieve the mentioned objective.

However, with respect to the objective of improving the effectiveness of the funding options and address the divergent access conditions in resolution and outside resolution, not all options are able to achieve the policy objectives to the same extent. From this perspective, the design features on access conditions to, and availability of funding are intrinsically linked with the scope of resolution that would be achieved as predicated by the PIA under the various options. In this respect, option 3 is the preferred option retained, as it achieves a strong funding from industry-funded safety nets aimed at supporting transfer strategies for failing banks in resolution or under alternative measures, if available, setting the stage for a credible broadening of the resolution scope.

Option 3 would make more DGS funds available for measures other than the payout of covered deposits in insolvency by harmonising the ranking of deposits through a single-tier preference in the hierarchy of claims and removing the super-priority of the DGS. Option 2 would enable a more modest use of DGS funds through a two-tier depositor preference without the super-priority of DGS, and thus lead to a less ambitious CMDI reform, which would require the same types of legislative changes as option 3 only with a lower impact in terms of achieving the overall objectives of the framework. It should, however, be acknowledged that option 3 would reduce the flexibility for resolution authorities to allocate losses to non-covered non-preferred deposits without breaching the “no creditor worse off” principle, as they would rank pari passu with other deposits excluded from bail-in. The preferred option 3 provides for a reinforced role of DGSs in the context of the CMDI framework. In particular, it promotes a more efficient use of more DGS resources for transfer strategies and introduces the possibility for DGSs to contribute to bridge the gap between deposits and 8% TLOF, under the least cost test.

All these changes are likely to translate into a more intensive use of DGS funds for measures other than the payout of covered deposits, which in turn may lead to higher costs for the industry in case of replenishment needs and potentially, higher risks of shortfalls. The magnitude of these costs for the industry may be higher under option 3 than under option 2, but they would also be balanced by addressing the identified problems to a greater extent and in a more credible manner and achieving greater societal benefits through a considerably higher likelihood to preserve financial stability, protect public funds and deposits. Also, as shown in the evaluation (sections 7.1.4.4. and 7.2.2.6) using DGS funds to facilitate transfer transactions in resolution or alternative measures is likely more efficient than paying out covered deposits in insolvency (baseline).

In the absence of EDIS, the only available avenues to remedy a DGS shortfall would be recourse to industry ex post contributions, alternative funding arrangements 136 and, in insolvency, to supplement the DGS intervention with liquidation aid financed by the State. In all cases, the solutions are less efficient than receiving financing from a centralised EDIS, which would provide an opportunity for lowering banks’ contributions and a much more easily accessible source of financing compared to borrowing from other DGSs or the market. Moreover, an EDIS backstop to national DGS funds would weaken the bank-sovereign link. The political reality, however, has removed the implementation of EDIS as part of this CMDI reform package. But even without EDIS, the CMDI reform would improve the framework substantially by ensuring more banks could be handled via the harmonised framework by using the banks’ loss absorbing capacity and industry-funded safety nets rather than taxpayers’ funds.

Finally, also when it comes to the objective of addressing the uneven and inconsistent depositor protection, all options provide clarifications aimed at reducing the divergences in the protection of depositors across Member States (see further Annex 6). However, the lack of robustness in DGS funding identified as an issue in Chapter 2 cannot be fixed via this reform in the absence of EDIS.

The proposed policy options would not have a significant impact on administrative costs (i.e. information provision obligations by banks and resolution authorities), which would remain low under all options. This is because, the very marginal increase in reporting burden for banks entering the scope of resolution for the first time 137 would be offset by the relief resulting from removing the MREL decision for liquidation entities where the MREL requirement is equal to own funds, as also shown in Annex 3.

It can be concluded that, from a technical point of view, Option 3 is the one that would, on balance, meet most of the objectives in the most effective, efficient and coherent manner. This would entail a legislative proposal addressing the funding and the incentive compatibility problems in the CMDI, namely measures to improve the proportionality of accessing the resolution fund for deposit-based banks, by opening the possibility for the DGS to be used to cover some of the losses that would otherwise be borne by depositors (in order to reach the 8% TLOF and access resolution financing). The improvement in proportionality is necessary in order to make the framework work for smaller/medium-sized banks and it does not go beyond what is strictly necessary for the sake of meeting the policy objectives.

These technical considerations are aligning well with the equally relevant political ones expressed by Member States in the June 2022 Eurogroup statement and by the European Parliament 138 . While the Commission retains full authority and independence in proposing legislation, it is appropriate and efficient to take into account the elements emerging from the related political discussions. Striking a balance between a solution which can satisfactorily address the identified problems while being sufficiently supported politically should form the basis for a successful negotiation between the co-legislators.

REFIT

The proposed reform will bring about benefits with respect to administrative efficiency and cost savings. These are largely the result of the various proposed measures to increase the harmonisation of certain elements of the framework and to clarify points, which have led to considerable discussion to achieve agreed interpretations.

In this respect, the measures proposed on the least cost test and the use of a consistent methodology across different uses of DGSs will bring more simplification. Similar positive impacts should be expected from the proposed clarifications to the use of DGSs in resolution (Article 109 BRRD), and the use of resolution fund resources for liquidity purposes. Other relevant clarifications in this respect are those related to the use of early intervention measures, where simplification and clarity is achieved by removing overlaps with supervisory measures, which have so far impaired the use of early intervention measures. In addition, clarifications of FOLF triggers and the concept of winding down under national measures applying in case of negative PIA will ensure further certainty and consistency of outcomes of the procedures available.

Additionally, the proposed harmonisation of the ranking of depositors will bring about more consistency and harmonisation across Member States on the treatment of deposits, avoid uncertainties and potential unlevel playing field. It will also facilitate the role of the resolution authorities when assessing the existence of breaches of the no creditor worse of principle. In the same manner, the proposed technical improvements in the DGSD 139 are expected to remedy application issues and improve, overall, the consistency of depositor protection in the EU.

Finally, the improvements included in this initiative are “future-proof” and deemed to significantly enhance the preparedness of banks and resolution authorities in dealing with emerging and future crises cases, especially in the context of the deteriorating economic environment due to geopolitical tensions.

Other impacts

Climate and environmental impacts

Pursuant to Article 6(4) of the European Climate Law 140 , no direct climate or environmental impacts and no significant harm, either direct or indirect, are expected to arise from the implementation of the preferred option. The initiative may have some indirect positive impacts on fostering the transition to a more sustainable economy by increasing financial stability and the overall resilience of the banking sector, therefore enabling banks’ contribution to green transition goals. This effect would be however indirect and is not possible to quantify. The initiative is considered to be consistent with the objectives of the European Climate Law.

Social impacts

Employees are not directly impacted. A robust and resilient banking sector and enhanced protection of depositors in cases of bank failures, including of SMEs and larger corporate depositors, would increase the likelihood that employees would be able to keep their jobs in companies that hold deposits and are clients in banks. Moreover, a solid banking sector could better contribute to financing the economy and promoting growth which would benefit the non-financial sector and their employees. No further significant social impacts are expected.

SMEs

The CMDI review is not directly addressed to SMEs, however they would benefit from the improvements that the reform is expected to bring, in their quality of depositors and bank customers. The initiative aims to ensure that the crisis management toolbox can be flexibly applied to more smaller/medium-sized banks in a manner that achieves the framework’s objectives, including the protection of depositors, which can be SMEs. Additionally, enabling crisis management tools facilitating the transfer of the failing bank’s business to a buyer would ensure the continued client relationship for depositors, including SMEs and avoid the interruption of access to the accounts and the risk of losing the non-insured part of their deposit, as in case of an insolvency.

Digitalisation

This initiative has a slightly positive impact on digitalisation, arising notably through the proposed option to broaden the use of DGS funds for supporting the handling of failing banks through measures other than payout in insolvency (i.e. resolution, preventive or alternative measures), which would be disruptive for customers’ continued access to their accounts for a significant period of time. Based on our assessment, the preferred option would ensure continued access to customer accounts, an important element encouraging digitalisation in banking services.

External impacts

This initiative does not specifically target third countries or their entities, as it is focused on reforming the EU CMDI framework. However, certain benefits arising from further legal clarity, harmonisation and standardisation (i.e. depositor preference in the creditor hierarchy) would also benefit entities of third country banks operating in the EU.

Impact on fundamental rights

The preferred option respects the rights and principles set out in the Charter of Fundamental Rights. The free movement of persons, services and establishment constituting one of the basic rights and freedoms protected by the Treaty on the European Union and the Treaty on the Functioning of the European Union is relevant for this measure.

The preferred option will not have any negative impacts on fundamental rights since most Member States recognise that the need to safeguard the rights of banks’ shareholders and creditors must be balanced against the rights of taxpayers, depositors and the general interest of protecting economic value and financial stability. Overall, the impact on fundamental rights will be neutral.

8.How will actual impacts be monitored and evaluated?

The Commission shall carry out an evaluation of this package of proposed amendments, five years after its entry into application and present a report on the main findings to the European Parliament, the Council and the European Economic and Social Committee. The evaluation shall be conducted according to the Commission's better regulation Guidelines. Member States shall provide the Commission with the information necessary for the preparation of that report. The evaluation will be based on a list of specific and measurable indicators that are relevant to the objective of the reform, as presented in the following table.

Summary of indicators

(*) This type of indicators would capture several of the general objectives of the CMDI framework (such as financial stability, breaking the sovereign-bank nexus, etc.) and disentangling the individual effects would not be possible.

Compliance and enforcement will be ensured on an ongoing basis including, where needed, through infringement proceedings for lack of transposition or for incorrect transposition and/or application of the legislative measures. Reporting of breaches of EU law can be channelled through the European System of Financial Supervision, including the national competent authorities, EBA as well as through the ECB. EBA will also continue publishing its regular reports, such as the reports taking stock of the compliance with MREL in the EU. This is run in parallel with the quarterly MREL dashboard published by the SRB for the Banking Union. EBA will also continue to assess and monitor the resilience and the funding levels of the national DGSs.

Annex 1: Procedural information

1.Lead DG, Decide Planning/Commission work programme references

This impact assessment report was prepared by Directorate D “Banking, insurance and financial crime” of the Directorate General “Directorate-General for Financial Stability, Financial Services and Capital Markets Union” (DG FISMA).

The Decide Planning references are:

·PLAN/2020/8120: BRRD Review – Proposal for a Directive of the European Parliament and of the Council amending Directive 2014/59/EU (BRRD)

·PLAN/2020/8121: DGSD Review – Proposal for a Directive of the European Parliament and of the Council amending Directive 2014/49/EU (DGSD)

·PLAN/2020/8122: SRMR Review – Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) 806/2014 (SRMR)

This initiative was part of the Commission’s 2021 Work Programme 141 , though its timing was determined by the long-awaited political agreement on a comprehensive work plan to complete the Banking Union, which was not achieved in the June 2022 Eurogroup. Instead, the Eurogroup invited the Commission to table legislative proposals for reforming the CMDI framework 142 .

2.Organisation and timing

Eight Inter-Service Steering Group (ISSG) consultations – chaired by SG – were held between 2020 and 2023:

-19 October 2020

-25 March 2021

-11 May 2021

-4 June 2021

-18 May 2022

-12 to 16 September 2022 (under written procedure)

-25 November 2022

-17 January 2023.

The ISSG consisted of representatives from various Directorates-General of the Commission: BUDG, COMP, ECFIN, GROW, JUST, REFORM, TRADE, SG and SJ. The contributions of the members of the Steering Group have been taken into account in the content and shape of this impact assessment.

Adoption of the package is expected in April 2023.

3.Consultation of the RSB

An upstream meeting was held with the Regulatory Scrutiny Board (RSB) on 28 April 2021.

The draft report was sent to the RSB on 28 September 2022 and the hearing took place on 26 October 2022. The RSB delivered a negative opinion on 28 October 2022. The report was resubmitted to the RSB on 9 December 2022; the RSB then issued a positive opinion on 17 January 2023.

The principal areas/topics raised by the RSB’s opinion of 28 October 2022 are addressed and clarified in this Impact Assessment in the following manner:

The limited suggestions raised by the second RSB’s opinion of 17 January 2023 are addressed and clarified in this Impact Assessment in the following manner:

4.Evidence, sources and quality

The impact assessment evaluation drew on a broad range of information sources such as results of consultations with stakeholders, reports from the EBA, and additional desk research by the Commission services. More specific sources included:

·Eurogroup’s Statement of June 2022 143 ;

·The Commission’s 2019 review report of the BRRD and SRMR 144 ;

·Overview of past cases of bank failures, including those handled under State aid rules 145 ;

·11 expert group meetings with Member States as part of the Commission’s Expert Group on Banking, Payments and Insurance (EGBPI);

·The European Parliament’s 2021 report on the Banking Union 146 ;

·Feedback from the inception impact assessment which took place between 10 November – 8 December 2020 and gathered 15 responses from EU and third countries (see Annex 2);

·Two public consultations on the experience with the application of the CMDI framework and views on its revision (see Annex 2):

oa public (general) consultation 147 which ran for 12 weeks from 25 February– 20 May 2021 and gathered over 90 responses from a broad range of stakeholders across the EU, and

oa targeted (technical) consultation 148 which took place between 26 January and 20 April 2021 with over 90 responses received from a broad range of stakeholders across the EU, as well as third countries;

·Feedback from DG FISMA’s conference organised on 18 March 2021 discussing the challenges in the current CMDI framework and exploring potential avenues for its review 149 (see Annex 2);

·An administrative arrangement (N FISMA/2020/003/D3/AA) with the Joint Research Centre in 2020/21 on Financial Safety Nets in the European Union (FinSafEU) for analytical assessments in particular on risk-based contributions, temporary high balances, different EDIS designs and the review of the BRRD framework (see Annex 12);

·A Call for advice to the EBA targeted on funding issues in the CMDI framework 150 (see Annex 11);

·Four reports from the EBA on the implementation of the DGSD 151 ;

·EBA reports, i.e. on the application of early intervention measures in the EU 152 ;

·ECB’s occasional paper on why DGSs in the EU should be able to support transfers of assets when a bank fails 153 ;

·A study financed under the European Parliament’s pilot project “Creating a true Banking Union” on the options and national discretions under the DGSD and their treatment in the context of a European Deposit Insurance Scheme (EDIS) 154 ;

·A study financed under the European Parliament Pilot Project “Creating a true Banking Union” on the differences between bank insolvency laws and their potential harmonisation 155 ;

·50 bilateral meetings with resolution and competent authorities between 2019 and 2022;

·Third party events (e.g. seminars, workshops, conferences) on the topic of the CMDI framework 156 ;

·58 bilateral stakeholder meetings with banks, industry associations, think-tanks (between 2019 and 2022);

·The Risk reduction monitoring report prepared jointly by the Commission services, the ECB and the SRB for the Eurogroup meeting of 30 November 2020 in view of the political decision to approve the ESM Treaty reforms and the early introduction of the backstop to the SRF 157 and the Eurogroup meeting of May 2021 158 and subsequent edition of November 2021 159 .

·Discussions in the High Level Working Group (HLWG) on EDIS and the Council’s Working Party (CWP) 160 ;

·Eurogroup conclusions of November 2020 161 , calling for a review of the CMDI framework and which agreed the early introduction of a common backstop to the SRF in 2022;

·The Fit for the Future (F4F) Platform’s opinion on the completion of the Banking Union. 162

·The Financial Stability Board’s (FSB) Too big to fail (TBTF) report 163 evaluating the application of resolution frameworks for global systemically important banks around the world.

The Commission services also took into consideration the report by the European Court of Auditor’s on the functioning of the Single resolution mechanism 164 and on the control of State aid to financial institutions 165 .

Annex 2: Stakeholder consultation

1.Introduction

The European Commission is currently reviewing its CMDI framework and is expected to make legislative proposals in Q1 2023. In order to understand better the performance of the framework as well as the possible scope for improvements, the Commission undertook extensive exchanges through different consultation tools to reach out to all stakeholders involved. Annex 2 provides a summary of the consultation activities that were considered while preparing the impact assessment.

2.Consultation strategy

To ensure that the Commission’s proposal on the CMDI framework review adequately takes into account the views of all interested stakeholders, the consultation strategy supporting this initiative builds on the following main consultation activities:

-An Inception Impact Assessment 

-A targeted consultation open for a total period of 12 weeks

-A public consultation open for a total period of 12 weeks

-Targeted consultations of Member States and bilateral exchanges with stakeholders and resolution/competent authorities

-A high-level conference 

-EBA opinions

-The F4F Platform’s opinion on the completion of the Banking Union

The results of each component are presented in the synopsis report below.

3.Feedback on the combined inception impact assessment/roadmap

The combined Inception Impact Assessment and roadmap aim to provide a detailed analysis on the actions to be taken at the EU level and the potential impact of different policy options on the economy, the society and the environment. The feedback period for the Inception Impact Assessment lasted four weeks (10 November – 8 December 2020). The Commission received 15 responses through the “Have Your Say!” portal from different stakeholder groups: banking associations (5), public authorities (4), company/business organisations (2), trade union (1), academia (1) and “other” (2).

All respondents acknowledged the need for a targeted review of the CMDI framework to increase its efficiency, proportionality and overall coherence. Some respondents emphasised the need for improving the applicability of existing resolution tools.

Most feedback, including from both large and small/medium-sized banks, supports levelling the playing field in the management of bank failures, in particular, by reducing discretion and ensuring more consistency in the application of the public interest assessment (PIA) and by limiting incentives for resorting to solutions outside resolution. One respondent underlined that any initiatives for further harmonising the creditor hierarchy and increasing the level of protection of (certain) creditors, should be treated with caution, while a detailed assessment of the associated costs will need to be reflected in the impact assessment.

As regards funding solutions (sources, access conditions) in resolution and insolvency, most feedback supported that the CMDI framework should include proportionate and adequate solutions for the management of failures of any type of bank, but without compromising the principle of burden sharing which is inherent to the Bank Recovery and Resolution Directive (BRRD). According to most respondents, a review of the conditions for granting State aid in- and outside resolution would be necessary. One respondent called for a simpler and more transparent methodology for calculating the contributions to the Single Resolution Fund (SRF), and requested the same for the methodology for contributions to a European deposit insurance scheme (EDIS).

As regards depositor protection, some feedback called for a preservation of national protection systems and of national options such as preventive and alternative measures that have worked well in the past. However, most of the views converged that there is a need for improving the efficiency of these measures, in particularly through clarification of their conditions, limits and purpose. One respondent flagged that risk-reducing specificities of institutional protection schemes (IPS) should be duly considered.

Most respondents underlined that any policy options should consider the potential ramifications with regard to the discussions on EDIS. Three respondents support that the pooling of funds from various sources should be avoided or not form part of the review. Two respondents were of the view that EDIS should not be part of the review.

4.Public and targeted consultations

The Commission launched two consultations 166 to seek stakeholder feedback on the application of the CMDI framework and views on possible modifications. The targeted consultation, covering 39 general and specific technical questions, was available in English only and open from 26 January to 20 April 2021. The public consultation consisted of 10 general questions 167 , available in all EU languages and the feedback period ran from 25 February to 20 May 2021. Both consultations were open for 12 weeks. In total, the Commission received 188 official responses and three additional replies were submitted informally. All but five respondents were stakeholders from the EU. Responses received were from a variety of stakeholders representing EU citizens (26%), business organisations (24%), business associations (16%), public authorities (19%), consumer organisations (2%) and academia (3%). It is also important to point out that numerous answers provided (in particular to the public consultation) were of the same wording and stance, thereby suggesting that certain respondents cooperated when drafting their response prior to submitting their final answers.

The Commission services published a ‘summary report’ on the feedback to both consultations on 7 July 2021 on the respective consultation pages. Below is a summary of the views expressed with regard to the experience with the framework so far and to future action to make the framework more resilient.

I.General objectives and review focus

a.Policy objectives

Respondents overall agreed that the CMDI framework is an improvement compared to the situation pre-2014/15 and that the objectives of the framework have been achieved to a large extent. Nevertheless, improvements are warranted. While respondents were satisfied with the protection of depositors and the reduced risk for financial stability stemming from bank failures, the framework, however, seemed to have failed in protecting taxpayer money and breaking the bank/sovereign loop. Respondents noted that more could be done with respect to minimising the recourse to taxpayer money and improving the level playing field among banks from different Member States, with certain respondents perceiving EDIS as a missing element to reach this objective.

b.Available measures in the CMDI framework

The majority of respondents who provided a view (88%) believed that some of the measures in the CMDI framework succeeded in fulfilling the intended policy objectives and the management of banks’ crisis, notably precautionary measures, provided that the latter remain limited in use. Early Intervention Measures (EIMs), however, were widely criticised by stakeholders pointing out the need to eliminate the overlap between EIMs and supervisory powers, with a significant preference for a merger in order to increase efficiency. The resolution tools were overall described as satisfying with certain institutions calling, however, for a more appropriately tailored mechanism for smaller and medium-sized banks and for an instrument for liquidity in resolution. Opinions on deposit guarantee scheme (DGS) preventive measures were split, with several respondents being in favour, while others demanding further harmonisation and clarifications on the relationship between State aid and DGSs. It was also noted that a harmonised European insolvency framework should be provided.

c.Exclusivity of the BRRD tools

Several respondents, including small and medium-sized banks as well as other stakeholders (ministries of finance), expressed caution to mix resolution tools with national insolvency systems, claiming that this would increase complexity and legal uncertainty. They suggested that smaller and medium-sized banks should continue undergoing national insolvency proceedings. Conversely, most respondents in the targeted consultation suggested that the tools and powers in the BRRD should be subject to changes and supported the extension, particularly through a wider use of the PIA to cover smaller and medium-sized banks. In terms of the different funding sources in resolution and insolvency, 55% of respondents were against a potential alignment of the access conditions (i.e. imposing the access condition to the resolution fund everywhere), fearing the creation of additional complexities and the infringement of the proportionality principle. By contrast, those in favour of the introduction of harmonised tools outside resolution strongly highlighted their preference for the creation of a harmonised “orderly liquidation tool”, notably for smaller and medium-sized banks, to prevent divergences in handling failing banks under national insolvency systems.

The need for a reform is generally supported by the industry, which sees merit in targeted amendments aimed at improving its practical application. Respondents from large and small/medium-size banks support an improved transparency and predictability of the PIA and agree to avoid paying additional contributions into industry-funded safety nets.

In terms of the possible expansion of the scope of resolution, several respondents representing smaller/medium-sized banks, in particular cooperatives and savings banks, may prefer to stay outside the scope of resolution to avoid costs related to additional requirements or possible ex post contributions to the safety nets. By contrast, several respondents representing large banks generally support bringing more smaller/medium sized banks into resolution to ensure a level playing field in the single market and improve the credibility of the framework. In this vein, these respondents also support the need to minimise moral hazard and the risks for public finances through holdings of loss-absorption buffers as a first and main line of defence, calling for caution over an extended use of industry funded safety nets for small/medium-sized banks and the prospect of additional future contributions to address replenishment needs.

d.Measures available before a bank’s failure

EIMs: Respondents showed broad support for improving the conditions for EIMs or other features of the framework in order to facilitate their use. However, a few stakeholders (banks) are of the opinion that EIMs should be deleted as supervisory powers are sufficient, while a few stakeholders (IPS, public sector) mentioned that they do not see an overlap between EIMs and supervisory powers.

Precautionary recapitalisation: Most respondents expressed a wish to maintain precautionary recapitalisation within the crisis management toolbox in order to provide flexibility and address exceptional situations. However, respondents consider that its application should remain limited to specific circumstances and be sufficiently strict. Others considered conditions as too strict. A few respondents called for a phase-out of the provision or refer explicitly to the need to avoid using precautionary recapitalisation. Most respondents are in favour of targeted amendments for clarification.

Preventive measures: Broad consensus was visible on the necessity to provide clarifications for the application of DGS preventive measures. Most respondents would welcome a more harmonised approach in the least cost test application. Several stakeholders (public sector, banks) highlighted that the conditions for the application of preventive measures should be aligned with the conditions for precautionary recapitalisation, while many respondents underlined the need to clarify that using the measures does not trigger a declaration of failing or likely to fail (FOLF). Regarding the application of State aid rules, DGS respondents supported that minimum burden sharing requirements should apply irrespective of the governance arrangements in place. Conversely, a sizeable number of respondents (mainly banks) believe that State aid rules should not be applicable for the DGS’ use for preventive measures, independently from the DGS private or public legal nature. Respondents from Member States that have IPSs noted the indispensability of preserving the well-proven national discretion for granting preventative measures. Some respondents from these Member States stressed that it is important that the functioning of IPSs recognised under Article 113(7) CRR can continue unchanged. In view of EDIS, the ring-fencing of losses absorbed by a national DGS within the local Member State to avoid that these losses are borne by other banking sectors is important for stakeholders from the banking industry. Views were split about the need for changing or not the creditor hierarchy (and extending the coverage to all deposits), in order to encourage or mitigate, respectively the use of such measures.

II.Experience with the framework and lessons learned for the future framework

a.Resolution, liquidation and other measures to handle banking crisis

In general, the majority of respondents consider that the resolution toolbox already caters for all types and sizes of banks, provided that the available tools are applied consistently in case of a failure of banks that are of public interest. Insolvency laws are generally seen as providing an appropriate framework for a liquidation of an institution, bearing in mind Member States’ specificities, but possibly at the expense of consistency in public interest assessments or scope of interventions of DGS due to the differing counterfactual insolvency scenarios. Regarding the accessing conditions to funding sources in resolution, the majority noted that DGS and EDIS funds should remain separated from the RF/SRF, with a few stakeholders underlining the necessity to improve the liquidity provision to banks post-resolution. A limited amount of respondents demanded an alignment between the source of funding and governance structures, stating that for national funding sources national authorities should have a prominent role. If funding were to rely mostly on European centralised funds, governance should accordingly be more centralised.

PIA: Most respondents acknowledge that the PIA must offer room for interpretation by authorities, but consider that the provision, as regulated now, gives opportunity for many different interpretations, thereby creating level playing field issues and uncertainty. Many respondents argue that the outcome of the PIA in the planning phase should be more predictable.

Small and medium-sized banks: While the extension of the PIA threshold to facilitate small and medium-sized banks’ access to resolution funds has been partly supported, numerous respondents defined the funding sources for smaller and medium-sized banks as sufficient. Many state that bail-in of shareholders and creditors should remain the main source of financing in resolution and stressing the existence of other relevant tools to help smaller and medium-sized banks (i.e. winding-up under insolvency proceedings sometimes involving State aid). The importance of the minimum requirement for own funds and eligible liabilities (MREL) was emphasised due to its role in preserving financial stability and ensuring depositor protection. Other respondents stressed that small and medium-sized banks should be liquidated and that therefore their MREL should not exceed the loss absorption amount. A few noted the role that retained earnings and other forms of equity could play in ensuring that small and medium-sized banks comply with their MREL.

FOLF: Regarding the existing legal provisions and their alignment between the conditions required to declare a bank FOLF and the triggers to initiate insolvency proceedings, the majority supports full or maximum possible alignment, bearing in mind restrictions in national law. Others raised caution when the FOLF assessment is based on likely infringements of prudential requirements. Furthermore, the vast majority of participants support the possibility of granting power to the supervisor to withdraw a licence, but not in all FOLF cases, typically covering resolution scenarios where such withdrawal would not be appropriate to preserve critical functions. The definition of FOLF was perceived as sufficiently flexible to assess scenarios on a case-by-case basis, while others highlighted the challenge to trigger FOLF based on likely infringements that are not related to the bank’s financial position.

Potential introduction of an orderly liquidation tool: The introduction of such tool, while welcomed by a few respondents, raised concerns with respect to its implementation. Several respondents insisted on the need to avoid amending/deteriorating existing tools, or considered possible impacts on constitutional features and existing national legal frameworks. In terms of differences between a liquidation tool and the sale of business tool in resolution, some respondents pointed at the fact that the orderly liquidation tool and normal insolvency proceedings pursue different goals, with the former aiming at mitigating effects on financial stability while the latter striving to maximise the proceeds for the creditor.

b.Level of harmonisation of creditor hierarchy and impact on no creditor worse off (NCWO) principle

A large majority of respondents indicated that the differences between bank creditor hierarchies across Members States could complicate the application of resolution action as they viewed these divergences as a source of increased fragmentation in the EU and differentiated treatment amongst creditors. The respondents who did not agree with the need to further harmonise the creditor hierarchy noted that insolvency laws are deeply rooted in national tradition/practices and interlinked with other (non-bank related) fields of law. With regard to the ranking of deposits, some respondents were in favour of a general depositor preference and of removing the super-priority of covered deposits, the latter with the purpose of allowing the effective use of DGS funds. However, a larger number of respondents were against this super-priority elimination, on the basis of minimising DGSs’ costs and liquidity needs, maintaining depositor confidence and financial stability and avoiding moral hazard.

c.Deposit insurance

Most respondents noted that deposits of public and local authorities should also be protected by the DGS, given that their exclusion creates additional management difficulties (consumer organisations and saving banks). Conversely, several banks and associations opposed adding additional groups, fearing it would increase their costs since both the target levels of national DGS and SRF would increase. The view of the majority of banks and DGSs is that the current regular information disclosure is sufficient and that no changes were necessary. Digital communication was often considered as the most suitable to save costs. Consumer organisations demanded that Article 16 of the Deposit Guarantee Scheme Directive (DGSD) on depositor information as well as the template in Annex I of the DGSD should be updated, clarified and more consumer friendly. Savings banks from one Member State highlighted that disclosure should take place only at the beginning of the business relationship, in case of relevant changes and only in digital format.

Regarding the EDIS, a majority of respondents supported its introduction. Some of them considered that national DGSs are limited in size and firepower and a fully-fledged EDIS would be an essential piece of the Banking Union. Moreover, others underlined that a fully-fledged EDIS would reduce the burden on banks, while minimising the probability of a call for ex post contributions, also avoiding pro-cyclical impacts on banks’ balance sheets. In contrast, other respondents underscored that EDIS would make the European financial system riskier because of contagion effects from one national banking sector to the other. As regards the efficiency of EDIS, some respondents considered that the more resources are shared in a common central pool, the more cost-effective the system would be. In contrast, other respondents believed that EDIS would not be cost efficient and that it would entail higher administrative costs, and more payout cases than under the current framework. Numerous respondents raised different concerns in relation to the transfer of funds from the national DGSs to the central fund of EDIS.

Some respondents (especially IPSs) highlighted that IPSs recognised as a DGS must be excluded from EDIS. In the event that they were included, being a member of an IPS should be considered as risk reducing factor when calculating the contributions. Conversely, other respondents insisted that IPSs should be included in EDIS in order not to weaken its firepower, to maintain a level playing field and depositor confidence.

Concerning specific parameters of EDIS, participants raised various views and concerns with the majority of responses underlining the need for caps in order mitigate the first mover advantage while others mentioned the maturity of the loans from EDIS to the national DGS as a crucial parameter. In relation to options and national discretions (ONDs), views were split, with some expressing opposition to the financing of ONDs covered by central financing, others being in favour of expanding the common deposit insurance mechanism to include the coverage of ONDs and some calling for a harmonisation of ONDs. Views were split as regards to whether SRF and EDIS funds should be merged, with those against stressing that the roles of these funds are different.

5.Targeted consultations of Member States

From 2019-2021, the Commission discussed topics analysed in this impact assessment with Member States, resolution authorities and designated authorities for the DGS during 11 meetings of the Expert Group on Banking, Payments and Insurance (EGBPI). To this effect, 17 non-papers including questionnaires were prepared:

­On 5 December 2019, the two studies commissioned by the Commission to external contractors, with the financial support of the European Parliament, under the Pilot project “Creating a true Banking Union” were presented. The studies covered the national options and discretions under the DGSD and their treatment in the context of EDIS 168 and the differences between bank insolvency laws and their potential harmonisation 169 . There was also a presentation on protection of client funds of payment and e-money institutions.

­On 27 January 2020, members were invited to comment on the advice from the EBA regarding the DGSD review, more specifically on the EBA opinions on eligibility of deposits, coverage level and cooperation between DGS, payouts, funding and uses of DGS funds.

­On 20 February 2020, the Commission presented possible approaches on further harmonisation of insolvency triggers, clarification of certain aspects of precautionary recapitalisation and improvements to the use of EIM.

­On 23 and 24 June 2020, there was an exchange of views with members on the use of DGS funds under DGSD and BRRD and continued the discussion on the EBA opinion regarding the DGSD review.

­On 16 July 2020, the Commission invited members to provide their views on the PIA and continued the discussion on the EBA opinion on the DGSD review.

­On 28 September 2020, the Commission continued the discussions on resolution and insolvency triggers and on the least cost test methodology for the use of the DGS, and consulted members on the harmonisation of the ranking of deposits in the creditor hierarchy in insolvency.

­On 15 October 2020, the Commission presented a preliminary assessment of the funding sources in the EU crisis management framework through stylised examples and gathered views on further elements on the creditor hierarchy harmonisation in insolvency and the protection of client funds of payment and e-money institutions.

­On 12 November 2020, members were asked for their views on the use of DGS in resolution and insolvency through stylised examples and on the legal feasibility of a potential harmonised liquidation tool in insolvency.

­On 14 December 2020, members discussed funding in resolution and enhancement of market integration through the application of existing legal provisions in a home-host balanced manner. One member presented their experience with high recovery rates for subordinated creditors and the impact of NCWO.

­On 25 February 2021, the SRB presented its views on the resolution of smaller to medium-sized banks reliant on deposit funding and members were asked to provide feedback on the EBA opinion on the interplay between the DGSD and the anti-money laundering Directive (AMLD).

On 26 April 2021, the Commission presented the outcome of surveys distributed in previous meetings.

In addition to the written input provided by the EGBPI members to the questionnaires following each meeting, two detailed surveys were circulated to members: (i) on the harmonisation of insolvency for banks (December 2019) and (ii) on mapping of DGSs in Member States (January 2020).

In parallel to the discussions in the Commission’s Expert Group, the issues addressed in this impact assessment were also covered in meetings of the Council’s preparatory bodies, namely the Council Working Party on financial stability and the Banking Union (CWP) and the High-Level Working Group on EDIS (HLWG).

In what concerns the most recent discussions, in the second semester of 2020 the CWP was chaired by the German Presidency. Of relevance for this impact assessment, Member States exchanged views on the following topics: interaction between supervisory powers under the Capital Requirement Directive (CRD) and EIM in BRRD, the resolution triggers and possible alignment with the national bankruptcy triggers, the creditor hierarchy in insolvency, the crisis management framework for smaller banks (with references to the PIA, a possible “EU bank liquidation regime”, the least cost test for the DGS and governance) and furthering market integration. In the CWP, the Commission presented an overview of the data collection exercise carried out to support the development of the methodology for calculating risk-based contributions under EDIS and the results of a survey on the parameters of the hybrid model. 170

In the first semester of 2021, when the CWP was chaired by the Portuguese Presidency, the discussions focused on the design of the hybrid model for EDIS (with focus on the inclusion of non-CRD/CRR entities, IPS recognised as DGS and third country branches), the treatment of the ONDs in the DGSD (particularly the financing of preventive and alternative measures), the risk-based contributions, the build-up of the central deposit insurance fund, the transition to the steady-state and the articulation between EDIS and the CMDI framework 171 .

In what concerns the HLWG, the discussions held at that level were structured around four work streams. 172 Of relevance to this impact assessment were the work streams on crisis management (which discussed topics such as early intervention measures, targeted amendments to the insolvency legislation for banks in the EU, handling of the failure of banks whose resolution is not in the public interest and need for expansion of the liquidation toolbox) and on EDIS (parameters and sequencing for the hybrid model, scope of common deposit insurance, conditionality, risk-based contributions, transitional path towards the steady state, articulation with the CMDI framework).

Further, 50 bilateral meetings with resolution and competent authorities as well as 58 bilateral stakeholder meetings (banks, industry associations, think tanks) took place over the period 2019-2022. In those meetings counterparts explained their country or business model specific situation and/or expressed their views on the CMDI framework orally, as also done through the consultations. More recent meetings in 2021-2022 focused on the possible policy options and their calibration possibilities. Requests for bilateral exchanges were accepted to the extent that the overall balance was maintained. The input provided is reflected in the impact assessment.

The views heard from Member States and industry stakeholders confirmed many of the Commission findings regarding the functioning of the current framework and need for reform. The input provided has been considered throughout the impact assessment.

6.High-level conference

On 18 March 2021, the Commission hosted the High-level conference “Strengthening the EU’s bank crisis management and deposit insurance framework: for a more resilient and efficient Banking Union”. 173 Amongst keynote speakers and panellists: representatives from the banking industry/associations, Ministries, national resolution authorities, DGSs, the SRB, the ECB, Members of the European Parliament, the EBA and academia. Many speakers confirmed the importance of an effective CMDI framework but also highlighted the current weaknesses. Although views were not fully converging, there was consensus regarding room for improvement to make the framework fit for purpose for all banks while protecting financial stability and preserving depositors’ trust.

The keynote speakers emphasised as core elements of a robust CMDI framework and Banking Union: (i) setting up EDIS, (ii) a careful calibration of the tools in resolution and insolvency to cater for specificities of smaller banks and (iii) a more effective use of funds in resolution and insolvency, including access to funding for smaller banks.

In the first panel, dedicated to issues pertaining to the tools in resolution and insolvency, most panellists agreed that changes to the toolbox are warranted. Panellists shared their experience with the framework and stressed the importance of predictability and called for an alignment of the Commission’s Banking Communication with the resolution framework. There was broad agreement on extending resolution to more banks, however on the exact scope views differed. Panellists stressed the importance of a clarification of the PIA. Some also noted the benefits of a harmonisation of insolvency frameworks. One panellist highlighted that the review should not hinder the role of banks to support the real economy and should strengthen financial stability.

In the second panel, dedicated to the issues of funding in resolution and insolvency, speakers highlighted that the current rules were too constraining and proposed different solutions to overcome the lack of access of smaller and medium-sized banks to financing sources. Panellists shared their experiences and noted that circumventions to resolution and burden sharing should be prevented. Further, the need to review the constraints to the use of the DGS and EDIS, to tailor MREL to the resolution strategy of each bank and to make the 8% requirement more flexible were highlighted. Some harmonisation of bank insolvency laws would also be welcomed.

The third panel voiced their views on how the deposit insurance framework could be further enhanced taking into account experiences from anti money-laundering cases or fintech companies. The increase in fintech players and the COVID-19 response measures led to a strong increase in deposits. Panellists noted that the current framework would benefit from further harmonisation and a better interplay of the DGSD with AMLD rules, the Payment Services Directive and State aid rules. Also, consumer confidence and trust should be reflected in the DGSD review (pointing at the Greensill case) as well as the situation of smaller markets. Further, panellists called for EDIS, to strengthen depositor confidence and reduce costs for the banking sector.

The Commission services invited stakeholders to provide their views through the two open consultations, which would be duly considered in the assessment and proposal.

7.EBA opinions

The Commission requested advice from the EBA on possible areas where the DGSD could be strengthened. In 2019 and 2020, the EBA issued four opinions under Article 19(6) DGSD 174 . See EBA opinions and Annex 6 for more information on the recommendations and how these were integrated into the impact assessment.

8.The F4F Platform opinion

The Banking Union completion topic and the CMDI review were included in the 2021 Annual Work Programme of the F4F Platform. In its final opinion, which was issued on 10 December 2021, the F4F Platform considers that there is room for improvement to make the CMDI framework fit for purpose for all banks, in a proportionate manner, taking into consideration potential impact on depositors’ confidence and on financial stability. The Platform also considers important, given the technical complexity and significance of the objectives pursued with the legislation, to factor in a proper time for allowing the markets and the public authorities to deploy the regulation correctly. To this end, the Platform brings forward five concrete suggestions for improvements:

Suggestion 1: Broadly merging of supervisory powers and EIM

The Platform calls for broadly merging the supervisory powers under the CRD with the early intervention powers under the BRRD and leaving only the most intrusive measures in the BRRD. According to the F4F Platform, this improvement will help ensuring that measures do not overlap but complement each other, thus increasing the consistency of EIM and its overall usage. The Platform also highlights that it should be ensured that the application of the EIM does not pose legal uncertainties with regard to the application of the Market Abuse Regulation which requires public disclosure.

See Annex 5 (evaluation) and section 4 of Annex 8, for more information on how the relevant suggestion of the Platform has been taken into consideration in this impact assessment.

Suggestion 2: Clarification of Article 16 DGSD – Periodic information on deposit protection

The Platform suggests that the provision of periodic information on deposit protection to depositors, as per Article 16(1) DGSD, should only take place at the beginning of the business relationship, or in case of relevant changes, as this could help in reducing the administrative burden.

Suggestion 2 flags an issue that is analysed in this impact assessment. However, as explained in section 3.2.8 of Annex 6, the approach proposed on this issue is to follow the EBA recommendation, which was supported by the vast majority of the experts in the EGBPI, that the annual information disclosure should not be altered because of its positive impact for depositor awareness.

Suggestion 5: Improve the consistency between the DGSD, Payment Services and E-Money Directives and increase the protection of client funds of e-money institutions and payment institutions

The Platform expresses the view that an improvement in the interaction between the DGSD, the Payment services and E-money Directives is warranted for increasing depositor protection and public trust in digital payment services offered by non-banks. In particularly, the Platform calls for improvements in the DGSD for clarifying the conditions, under which, client funds deposited with a credit institution by payment institutions or e-money institutions would be eligible for depositor protection under the DGSD. See Annex 5 (evaluation) and section 3.2.4 of Annex 6 for more information in how the relevant suggestion was taken into consideration in this impact assessment.

Finally, the Platform formulated suggestions for improving the legal clarity in the provisions concerning the FOLF triggers (Suggestion 3) and the assessment of the public interest for resolution (Suggestion 4). According to the Platform, legal changes in these two areas would be helpful for increasing the legal certainty and consistency in the handling of failed banks.

Annex 3: Who is affected and how?

1.Practical implications of the initiative

The objectives of this Annex are to summarise how option 3 (assessed as technically superior) addresses the identified problems and to set out the practical implications for the main stakeholders affected by this initiative, mainly the banking sector and their shareholders and creditors, resolution and supervisory authorities, as well as depositors and the taxpayers. The initiative aims to simultaneously address the following problems described in Chapter 2:

·Problem 1: Insufficient legal certainty and predictability in the management of bank failures;

·Problem 2: Ineffective funding options and divergent access conditions in resolution and insolvency; and

·Problem 3: Uneven and inconsistent depositor protection and lack of robustness in deposit guarantee scheme (DGS) funding.

By ensuring a timelier and expanded scope for resolution, which would limit the destruction of banks’ value when compared to liquidation proceedings, option 3 would enhance financial stability and generate net overall gains for taxpayers, depositors, including small and medium enterprises (SMEs), resolution authorities, but also the markets and the society at large. Banks’ costs may increase due to a broader use of DGS funds which would require replenishment through ex post industry contributions, which, in the absence of a European deposit insurance scheme (EDIS) cannot be lowered. Banks’ creditors may lose under these options due to bail-in when resolving more smaller/medium-sized banks, however this would contribute to reducing moral hazard and ensuring that losses are internalised to the bank’s claim holders rather than externalised to the society.

Option 3 would address the three problems identified by strengthening the legal certainty and clarity of the presumptive path for action in case of failing banks, ensuring more effective funding options and harmonised conditions to access them. Legal certainty and level playing field would be achieved through more standardisation and harmonisation of rules on: the application of the public interest assessment (PIA), use of DGS funds for various interventions, early intervention measures and failing or likely to fail declaration, the requirement to wind-down banks and foster market exit in case of negative PIA (to avoid legal limbo situations) and the harmonisation of depositor preference in the hierarchy of claims 175 . The revision of the least cost test for DGS interventions would improve the effectiveness and efficiency of the use of DGS funds, ensuring coherent and consistent approaches across Member States.

While most of these elements are similar across the option packages presented in Chapters 5 and 6, the changes proposed to the PIA under option 3 deliver a more significant expansion of the scope for resolution than other options. This goes hand in hand with the ease of accessing funding under the retained option.

Option 3 would improve the access to the resolution funds (RF) or the Single Resolution Fund (SRF) 176 and DGS funds in resolution for an increasing number of smaller and medium-sized banks coming in the scope of resolution through an extended PIA. This implies, in particular, that the restructuring of failing smaller and medium-sized banks, possibly under transfer strategies in resolution or alternative measures in insolvency would be financed more credibly and with more proportionality than under other options. The access to the RF/SRF would be facilitated without compromising the principle of minimum bail-in condition, which safeguards against moral hazard (i.e. making sure the bank’s shareholders and creditors are first in line to bear losses before any industry funded safety nets are employed).

The implementation of option 3 would largely benefit depositors (i.e. retail clients, SMEs, municipalities, other public institutions, large corporates, financial institutions) and taxpayers by shielding them from losses, which would be covered by the bank’s internal loss absorbing capacity and industry funded safety nets. Depositors would benefit from placing more smaller/medium-sized banks in resolution and having their deposits transferred to a healthy bank with the help of the DGS funds, as they would preserve continued access to their accounts, avoid a run on the bank and benefit from a more efficient use of DGS funds. Taxpayers would benefit as well since handling distressed banks would be more likely financed through industry-funded safety nets rather than public money. The size of available funding to enable transfer transactions is directly proportional with the protection of the respective depositors and taxpayers in the EU.

Banks and their shareholders, investors, employees and depositors would also benefit from the retained option from the perspective of enhanced legal clarity and level playing field in the application of rules and enhanced standardisation. While depositors would be more protected from losses under these options, other investors may see their claims written-down or converted into capital by applying bail-in. However, option 3 would benefit most stakeholders through the preservation of banks’ franchise value and the safeguarding of commercial relations through a transfer transaction of parts or all the failing business to a healthy acquirer rather than by applying piece-meal liquidation. This may come at a cost for banks, as the more extensive use of DGS funds would require recouping the funds (possibly) disbursed through ex post industry contributions. However, this tendence would be compensated by a more efficient use of funds in resolution/alternative measures as opposed to a full payout in insolvency.

Resolution authorities would also benefit from the retained option, by relying on clearer and more harmonised rules when implementing the provisions of the law, reducing legal risks. Their incentives to decide on the application of certain crisis management tools would be more aligned and focused on the preservation of value, effectiveness and efficiency of outcome.

The initiative is neutral in terms of impact on administrative costs 177 , meaning, on aggregate, it neither adds nor removes administrative burden on banks, citizens or resolution authorities. Therefore, the initiative does not have a significant impact on the Commission’s ‘one in, one out’ approach 178 , seeking to scrutinise and monitor new and/or removed administrative costs (both one-off and recurring) for businesses. This is because, on one hand, banks earmarked for liquidation under the current framework and which would be entering the scope of resolution for the first time under this initiative, would be subject to the obligation to enhance their recovery plans, provide information to resolution authorities on a more frequent basis for the preparation of more extensive resolution plans and ensure they become resolvable. While this would involve some additional costs for banks, these are estimated to be marginal, because banks earmarked for liquidation already report data to resolution authorities who prepare resolution plans albeit on a less frequent basis (under simplified obligations). On the other hand, the initiative offsets these effects by providing some relief through waiving the need to adopt MREL decisions for a scope of banks earmarked for liquidation, where MREL is equal to own funds requirements (see Annex 8, section 8). The impact of this change is more meaningful for resolution authorities than for banks (due to the reduction in MREL decisions to be adopted and communicated to banks) and is rather localised in those Member States with less concentrated banking sectors (many small banks which have liquidation as preferred strategy in case of failure) and where the MREL requirement would not exceed own funds. 

Additionally, the society would benefit from financial stability and the protection and continuation of critical functions that banks deliver to citizens, more convergence and clarity on the presumptive path in the application of the rules and level playing field, fostering more confidence in the banking sector and the single market in banking.

Tables 2 and 3 summarise the impacts of the preferred option.

Table 2: Overview table depicting winners and losers

Table 3: Overview table depicting to what extent the options achieve the objectives

2.Summary of costs and benefits

Table 4: Overview of the benefits

(1) Estimates are gross values relative to the baseline for the preferred option as a whole (i.e. the impact of individual actions/obligations of the preferred option are aggregated together); (2) Please indicate which stakeholder group is the main recipient of the benefit in the comment section;(3) For reductions in regulatory costs, please describe details as to how the saving arises (e.g. reductions in adjustment costs, administrative costs, regulatory charges, enforcement costs, etc.); (4) Cost savings related to the ’one in, one out’ approach are detailed in Tool #58 and #59 of the ‘better regulation’ toolbox. * if relevant.

Table 5: Overview of costs

(1) Estimates (gross values) to be provided with respect to the baseline; (2) costs are provided for each identifiable action/obligation of the preferred option otherwise for all retained options when no preferred option is specified; (3) If relevant and available, please present information on costs according to the standard typology of costs (adjustment costs, administrative costs, regulatory charges, enforcement costs, indirect costs;); (4) Administrative costs for offsetting as explained in Tool #58 and #59 of the ‘better regulation’ toolbox. The total adjustment costs should equal the sum of the adjustment costs presented in the upper part of the table (whenever they are quantifiable and/or can be monetised). Measures taken with a view to compensate adjustment costs to the greatest extent possible are presented in the section of the impact assessment report presenting the preferred option.

3.Relevant sustainable development goals (SDGs)

Annex 4: ‘Zoom-in’ on core elements of the crisis management and deposit insurance framework

This Annex explains the core elements of the CMDI framework for a deeper understanding of the topic.

Since 2014, the Bank Recovery and Resolution Directive (BRRD) lays down a comprehensive and harmonised regime for the recovery and resolution of failing banks across the EU. The Single Resolution Mechanism Regulation (SRMR) complements that harmonised framework for the Banking Union. The Deposit Guarantee Scheme Directive (DGSD) lays down a set of harmonised rules for depositor protection. Besides reimbursing depositors in case of a failure of the institution up to EUR 100 000, deposit guarantee schemes (DGS) funds can be used to prevent the failure or to finance measures in insolvency (subject to the national transposition of this option) or in the resolution of credit institutions under certain conditions. On the contrary, insolvency is not harmonised and national bank insolvency proceedings differ substantially across the EU.

The CMDI framework was designed to avert and manage the failure of credit institutions of any size while protecting depositors and taxpayers. The framework provides for a set of instruments that can be applied in the different stages of the lifecycle of banks in distress. Before a bank is declared failing or likely to fail (FOLF), these instruments allow a timely intervention to address a financial deterioration (early intervention measures), to prevent the failure of a bank (preventive measures with funding from the DGS 182 ) or precautionary recapitalisation measures financed by the public budget under strict conditions. When a bank is considered FOLF and there is a public interest in resolving it 183 , the resolution authorities will intervene in the bank by using the tools and powers granted by the BRRD 184 in absence of a private solution. These include the power to sell the bank or parts of it to one or more buyers, to transfer critical functions to a bridge institution and to transfer non-performing assets to an asset management vehicle. Moreover, it includes the power to bail-in the bank’s shareholders and creditors by reducing their claims or converting them into capital, to provide the bank with loss-absorbing or recapitalisation resources. In the Banking Union, the resolution of systemic banks and cross-border groups is carried out by the Single Resolution Board (SRB). In the absence of a public interest for resolution, the bank failure should be handled through national orderly winding up proceedings, sometimes with financing from the DGS or other sources, carried out by national authorities.

Figure 10: Measures and bodies of the CMDI framework

Source: European Commission

The framework is intended to provide a combination of funding sources to manage failures in an economically efficient manner, while preserving the bank’s franchise value and reducing recourse to the public budget and ultimately the cost to the taxpayers. The costs of resolving the bank (i.e. the losses) are first allocated to the shareholders and creditors of the bank itself (bank’s internal loss absorbing capacity), which also reduces moral hazard. If needed, resources can be complemented by resolution financing arrangements funded by the industry (through the national resolution funds (RF) or the Single Resolution Fund (SRF) in the Banking Union and the DGSs) to cover the remaining losses. In the Banking Union, these rules were further integrated by entrusting the SRB with the management and oversight of the SRF, which is funded by contributions from credit institutions and certain investment firms in the participating Member States of the Banking Union. Depending on the tool applied to a bank in distress (e.g. preventive, precautionary, resolution or alternative measures) and the specificities of the case, compliance with the State aid rules may be necessary for interventions by a RF, a DGS or public funding from the State budget.

The State aid rules for banks 185 are intrinsically interconnected with, and complementary to the CMDI framework. The two frameworks are applied consistently by the Commission (e.g. the Commission checks if a a public or private support qualified as a State aid measure violates intrinsically linked provisions of the CMDI framework and cannot authorise it, if it does so). Despite their natural interlinkages, the two frameworks are meant to tackle different issues: State aid rules’ main purpose is to limit competition distortions from such support to banks, while the CMDI framework’s primary objective is to limit risks to financial stability from the disorderly management of bank failures while avoiding or minimising the use of public funds and ensuring depositors’ protection.

In order to ensure consistency between the two frameworks, in November 2020, the Eurogroup invited the Commission to carry out and finalise its review of the State aid rules for banks, in parallel to the review of the CMDI framework, ensuring its entry into force at the same time as the revised CMDI framework. Such timeline aims at ensuring consistency between the two frameworks, adequate burden sharing of shareholders and creditors to protect taxpayers and depositors, and preserve financial stability 186 . In June 2022, the Eurogroup took note of the intention of the European Commission to finalise the review of the State aid framework for banks, to ensure consistency between the State aid framework and the renewed CMDI framework.

Having the objective of coherence in mind, it is important to underline that the CMDI framework is subject to co-legislation, which will require time, and its outcome as compared to the Commission proposal is uncertain, while an update of the State aid rules requires a Commission Communication, which, when decided by the Commission, could take effect immediately.

Notwithstanding the interactions between the various components of the current legislative framework, the reform of the State aid rules is not part of the present impact assessment nor of the subsequent legislative proposal. A separate process to assess the need for a review of the State aid rules is ongoing, in parallel to the review of the CMDI framework, also in light of different procedures to amend the relevant acts 187 .

In terms of deposit protection, deposits are protected up to EUR 100 000 per depositor and per bank, under the DGSD, regardless of whether the bank is put into resolution or insolvency. In insolvency 188 , the primary function of a DGS is to pay out depositors within seven days of a determination of unavailability of their deposits. Under the DGSD, DGSs may also have other functions (all aimed at preserving depositor confidence) such as financing preventive measures or, financing measures in insolvency other than payout, i.e. a transfer of assets and liabilities to a buyer, to preserve the access to covered deposits (DGS alternative measures). The DGSD provides a limit as regards the costs of such preventive and alternative measures. They can never be more costly than a payout of the covered amount. Moreover, DGSs can contribute financially to a bank’s resolution, under certain conditions.

The functioning of the DGSs and the use of their funds cannot be seen in isolation from the broader debate on the European deposit insurance scheme (EDIS).

Notwithstanding the progress achieved, areas for further strengthening and adjustment were identified with regard to both the resolution and depositor insurance framework. The evaluation of the current rules (see Annex 5) has identified issues with the framework’s design, implementation and application. The review of the CMDI framework should provide solutions to address these issues and enable the framework to fully achieve its objectives 189 and be fit for its purpose.

The revision of the CMDI framework as well as a possible further harmonisation of insolvency laws are foreseen in the respective review clauses of the legislative texts. The review is part of the agenda for the completion of the Banking Union, as emphasised in President von der Leyen’s Political Guidelines . Although the political guidelines included the creation of EDIS, it will not be part of the current initiative because political discussions on EDIS and other workstreams of the Banking Union completion plan have yet to be finalised.

Insolvency

National insolvency proceedings are not part of the CMDI framework, but they are alternative to it. The resolution authority may conclude that the bank does not need to be put in resolution because its failure would not have a significant impact on financial stability or would not endanger any critical function and that the tools available in the insolvency law of the relevant Member State are adequate to manage the bank’s failure (i.e. the public interest assessment is negative). In this case, the bank is put in insolvency according to national law. Very small banks are likely candidates for being credibly handled when they fail through insolvency proceedings, without creating ripple effects in the financial system or the real economy.

The procedure and tools available in this case depend on the national legislation. These may vary widely from Member State to Member State. Some foresee a judicial “atomistic” insolvency procedure, leading to the sale of the assets in a piecemeal fashion to repay the creditors in order of their ranking in the hierarchy of claims, similar to the insolvency available for regular corporations (in some countries the insolvency procedure is actually the same for banks and other companies).

Certain Member States’ legislations provide for administrative insolvency proceedings for banks. These are generally managed by an administrative authority in cooperation with the relevant court. Concretely, these procedures provide for measures similar to the resolution tools, such as selling the whole business (i.e. also the liabilities) to a buyer without the consent of the failing bank’s creditors.

Normally, funding from sources outside of the bank’s assets should not be required in insolvency, as creditors are expected to bear losses and share any value realised through the liquidation (sale) of assets, in order of their ranking in the hierarchy of claims. However, for the insolvency of banks, the DGS has the possibility to use an alternative measure to payout, aiming at preserving the depositors’ access to covered deposits, such as a transfer of the assets and liabilities and deposit book to an acquiring bank. This tends to be a more efficient and effective solution than payout, however it is only available in 11 Member States (who transposed this national option). Actions under national insolvency law can also be financed with support from the public budget (State aid).

Merits of resolution versus insolvency, including for smaller and mid-sized banks in the CMDI framework

The fundamental principle of the EU harmonised resolution framework is to provide a common toolbox to deal effectively with any bank failure (irrespective of its geographical location, its size or business model i.e. domestic or operating across the border) in an orderly way, preserving financial stability and protecting depositors without relying on public funds. For many banks, such objectives cannot be met to the same extent under national insolvency frameworks, which, in some cases, are not adapted to the specificities of bank failures.

The CMDI framework implements in the EU regulatory framework the international consensus emerging after the global financial crisis (G20, Financial Stability Board decisions) that banks should never again be bailed out with public money. The set-up of the resolution frameworks around the world constituted a major paradigm shift from bail-out to bail-in (i.e. banks should pay for their own resolution/liquidation with their own resources as well as with industry-funded resources as opposed to public bail out).

This principle of not using taxpayer money for the financial industry is already well rooted in the EU. As an illustration, the Recovery and Resilience Facility 190 , an instrument part of NextGenerationEU adopted in the context of the COVID-19 pandemic and aimed at helping the EU emerge stronger and more resilient from that crisis explicitly excluded funding to banks and the financial sector. Similarly, the EU state Aid Temporary Framework 191 adopted in 2020 to enable Member States to use the full flexibility foreseen under State aid rules to support the economy in the context of the coronavirus outbreak also explicitly excluded State Aid to banks.

This principle of protecting taxpayer money was also at the heart of the CMDI framework when adopted in 2014. In addition to this objective, a common resolution framework and toolbox has a number of very important benefits compared to national insolvency proceedings:

·provides predictability and level playing field when handling (any) failing banks, which means that taxpayers, deposits and bank creditors are treated in the same manner across the EU,

·enhances preparedness, through recovery and resolution planning for crisis times, including by imposing requirements on banks to become resolvable and absorb possible losses internally or via the safety nets (thereby shifting away losses from taxpayers and internalising losses with the industry),

·increases efficiency in handling bank failures as it facilitates a restructuring/ sale of business to a buyer, preserving the bank’s franchise value without cutting access to client accounts and client relationships,

·fosters consumer confidence in the banking sector, significantly reducing the risk of spiralling contagion to other banks and mitigating the risks that bank clients may start questioning the solidity of the system and its safety nets as it could happen under normal insolvency proceedings, 

·ensures losses can be internalised by in the industry, by requiring banks to build resolution buffers and setting up industry-funded safety nets complementing internal bank buffers to absorb losses and avoid recourse to public funds for all banks and not only cross-border ones,

·fosters confidence between Member States that banks failures will be addressed in an effective way, thus preserving financial stability in the single market and the Banking Union, and

·protects Member States’ fiscal capacity which may be limited in crisis times.

However, despite the widely shared intention of protecting taxpayer money embedded in the CMDI framework since 2014, some Member States have continued to make recourse to taxpayer money when handling failing banks, since the establishment of the framework, as evidenced in Chapter 2 and Annex 5. This is not because they find it acceptable politically or economically to do so, but because they had to choose between protecting financial stability and deposits on one hand and protecting taxpayer money on the other hand. The current framework poses entry barriers for certain small and mid-sized banks through the onerous access condition to resolution funding, which some banks can only attain if deposits bear losses. However, bailing-in depositors would pose a significant risk to financial stability, as depositors would lose confidence in the banking sector and likely provoke bank runs and spiralling contagion, which can reverberate also into the real economy, as seen during the global financial crisis. There is therefore, a political consensus among Member States that the CMDI framework needs to be fixed in a way that resolution can be used for any bank where needed.

Background on the principle of subsidiarity in the CMDI framework (why should small/mid-sized banks be dealt with under the harmonised resolution framework vs national insolvency proceedings)

The resolution framework as it was created in 2014 was meant to be applicable to any bank when it fulfils the objectives of protecting financial stability, taxpayer money and depositors better than national insolvency proceedings 192 . The merits of resolution vs insolvency are assessed through the PIA, which is a case by case judgement, based on criteria on whether to place a bank in resolution or national insolvency proceedings. The PIA is, de facto, the subsidiarity test in the CMDI framework, as also indicated by recital 13 and Article 32(5) of BRRD I 193 .

In the Banking Union, the PIA decisions are made by the SRB for banks under its remit (systemic banks and less systemic cross border banks) and by the national resolution authorities for smaller banks, for which they are responsible (less significant institutions). Outside the Banking Union, national resolution authorities have the role to determine the path for managing a failing bank in all cases (PIA). This governance structure embedded in the CMDI illustrates the flexibility of resolution authorities to decide what is the pathway that best attains the sought objectives. The EU level rules do not impose or prescribe a treatment for any bank of any size, it provides the necessary discretion to resolution authorities to take the best decision. At the same time, to enable such decisions, the continuum of tools, including the harmonised resolution tools and national tools (preventive measures, administrative insolvency measures, piece-meal judicial insolvency measures) to handle failing banks are preserved in the framework.

In terms of scope of application, the framework applies to all banks. CMDI rules are appropriate for systemic banks, which are “too big to fail” and which will likely go into resolution (in general open-bank bail-in strategy) and be bailed-in if they failed. The framework is also deemed appropriate for very small banks, which are more likely to be placed in insolvency and be liquidated if they failed. However, there is a middle category of banks, which are not “too big to fail” but “too big to liquidate” for which the framework cannot be credibly used in all cases where it would be needed and for which other avenues involving taxpayer money were used in the past (see Chapter 2, the evaluation in Annex 5 and Annex 9 showing past cases of bank failures).

The CMDI review aims to improve the rules in a way that the harmonised resolution framework can also be used for this category of small to mid-sized banks, when resolution best achieves the objectives. To do so, the initiative will revisit: the PIA to include additional criteria to help authorities decide on the best avenue, the access to funding in resolution by using the DGS funds in certain framed circumstances, the least cost test for using DGS funds in and outside resolution to make sure it is harmonised among the various DGS funds uses. This would align incentives between choosing resolution and other avenues and ensure the choice is based on merits/objectives and not on cheaper access to funding.

Other main features of the CMDI framework

Preparedness and prevention

In order to prevent banking crises, all banks in the EU are required to prepare recovery plans under the supervision of competent authorities. Those plans set up a monitoring system integrated in the banks’ risk management, leading to the implementation of recovery options by the banks to restore their financial position at an early stage of distress (before failure). Additionally, resolution authorities draw up resolution plans outlining the preferred strategy and course of action in case of failure and setting a minimum requirement for own funds and eligible liabilities (MREL) with the aim of ensuring that the shareholders and creditors of the bank can absorb its losses and contribute to its recapitalisation 200 . If, during the planning process, the authorities identify obstacles to recovery or resolvability, such obstacles will be removed by taking appropriate measures 201 . For significant institutions within the Banking Union, the ECB/SSM is the relevant authority assessing the recovery plans, taking into account the recommendations of the SRB 202 . The SRB is responsible for the resolution of significant and cross-border institutions, after consulting with the ECB or the national competent authorities. For all other banks, inside and outside the Banking Union, the relevant resolution authorities remain national 203 .

Before failure – early intervention, preventive and precautionary measures

In case of a deteriorating financial position, the BRRD, SRMR and DGSD foresee specific intervention measures at an early stage to prevent a bank from failing. In particular, the supervisors have an expanded set of powers to intervene via so-called early intervention measures 204 . These powers include, for example, the ability to dismiss the board or management of a bank and appoint a temporary administrator, or to require the bank to draw up a debt restructuring plan with its creditors. Similarly, DGS funds can be used to prevent the failure of a bank under certain conditions (so called preventive measures 205 ). Finally, under certain conditions, the BRRD and SRMR exceptionally allow for the use of State aid without triggering resolution – the so-called precautionary recapitalisation and precautionary liquidity 206 . Such a public support to solvent banks is allowed to cover capital shortfalls identified during a supervisory stress test.

Failing or likely to fail

If a bank’s failure is deemed inevitable, the BRRD and SRMR require the competent 207 (or the resolution) authority to determine that it is “failing or likely to fail” (FOLF). The resolution authorities assess whether resolution is in the public interest, via a public interest assessment (PIA) on the basis of the need to pursue the resolution objectives, having also in mind the applicable national insolvency proceedings. In case of a positive PIA, the resolution authority will apply resolution tools. These may include selling the business to a private purchaser, setting up a temporary bridge bank to operate critical functions, separating bad assets through the transfer to an asset management vehicle and writing down debt or converting it to equity (bail-in). When the PIA is negative, the failing institution must be orderly wound up under national proceedings. The applicable creditor hierarchy 208 plays an important role in this context because it provides the order in which claims bear losses both in resolution and insolvency.

Financial safety nets

The framework sets up industry-funded safety nets that contribute to reducing the risk of bail-out by taxpayers. Resolution and deposit guarantee funds, financed by the industry, can provide financial support to failing banks in resolution if needed to complement the internal loss-absorbing capacity.

With the BRRD and SRMR, national resolution funds and the SRF for banks in the Banking Union 209 were set-up in 2015 and 2016 respectively. National resolution funds are established in each Member State and managed by the national resolution authorities. The SRF is established in the Banking Union and it is managed by the SRB. The resolution funds are expected to reach their target levels by 2024, which correspond to at least 1% of the covered deposits of all credit institutions operating in their remit. 210 Banks' (including certain investment firms) annual contributions to the national resolution funds and the SRF are based on their liabilities and risks. The resolution funds may be used only to the extent necessary to ensure the effective application of the resolution tools and as a last resort. Resolution measures financed by a resolution fund can take the form of contributions in lieu of the bail-in of certain creditors and loans or asset guarantees.

In order to access the RF/SRF for solvency (loss coverage) support, a minimum bail-in of 8% of total liabilities and own funds of shareholders and creditors (which may include depositors) must be carried out beforehand. A series of liabilities in the banks’ balance sheets are mandatorily excluded from bail-in, including covered deposits 211 . Although not explicitly stated in BRRD and SRMR, a systematic interpretation of the relevant legal provision indicated that the minimum bail-in condition does not apply when accessing the RF/SRF for liquidity support. If the RF/SRF does not have sufficient financial means to fund resolution, ex post contributions are raised to cover the additional amounts 212 . On an annual basis, the RF/SRF is replenished by ex ante industry contributions to ensure that the level of available funds is not below the target level 213 .

In line with the DGSD, national DGSs were established in each Member State and managed by the national DGS authorities. DGS funds are expected to reach a target level equivalent to at least 0.8% 214 of covered deposits in the respective Member State by July 2024. The primary objective of DGS funds is to ensure a harmonised protection of EUR 100 000 (or equivalent amount in the local currency) across the EU by paying out covered depositors up to that level in case their deposits become unavailable. Beyond the so-called “pay box function”, DGSs can also support, under specific conditions, proceedings in resolution 215 and insolvency 216 , as well as preventive measures to avoid the failure of a credit institution 217 .

The conditions to access DGS funds for resolution, preventive measures and alternative measures diverge 218 . In resolution, the DGS may be liable for the losses that covered depositors would have borne were they not excluded from loss absorption, up to the limit of the losses the DGS would have suffered in insolvency.

In insolvency, the DGS has the possibility to use an alternative measure to payout 219 aiming at preserving the depositors’ access to covered deposits, such as a transfer of the assets and liabilities and deposit book to an acquiring bank. Under Article 11(6) DGSD, the DGS can finance an alternative measure if its cost is limited to the “net amount of compensating covered depositors”. In this context, the DGS has to compare the cost of the payout and the cost of the alternative measure (i.e. the least cost test), and applies the least costly option.

For non-failing banks, preventive measures aim to prevent the failure of a bank so that it continues as a going concern. Such intervention is subject to conditions. Under Article 11(3)(c) DGSD, the cost of the measures cannot exceed “the costs of fulfilling the statutory or contractual mandate of the DGS”. The interpretation of this condition varies among Member States. Some apply a least cost test similar for preventive and alternative measures, while others do not apply any least cost assessment for preventive measures.

When the financial means of the DGS are not sufficient to fund the necessary measures, the DGS may seek to obtain the missing funds through ex post contributions raised with the industry, through borrowing with other DGSs and/or through a loan from the State budget (which is the backstop of the DGS). Once the DGS funds have been depleted, the fund is replenished through ex ante industry contributions 220 .

Figure 11: EU resolution and insolvency framework

Source: Commission services

Annex 5: Evaluation of the CMDI framework

1.Executive Summary

The EU bank crisis management and deposit insurance framework lays out the rules for handling bank failures and ensuring the protection of depositors. It was built around the objectives of maintaining financial stability, protecting depositors, minimising taxpayer losses, limiting moral hazard and improving the internal market for financial services. The EU CMDI framework implements the commitments by the G20 leaders in September 2009 that bank failures should be managed in an orderly manner through cross-border resolutions and that the moral hazard stemming from banks being considered “too big to fail” should end 221 . The EU went beyond the recommendations addressed to the global systemically important banks, implementing a crisis management framework for all banks.

While the CMDI framework applies to all EU Member States, in the Banking Union, further integration is achieved with the Single Supervisory Mechanism (first pillar of the Banking Union), the Single Resolution Mechanism (second pillar of the Banking Union) and the European deposit insurance scheme (EDIS – the still missing third pillar of the Banking Union) 222 .

The framework covers three EU legislative texts which, together with the related implementing and delegated acts and relevant national legislation form the rulebook for handling bank failures: the Bank Recovery and Resolution Directive (BRRD), the Single Resolution Mechanism Regulation (SRMR) and the Deposit Guarantee Schemes Directive (DGSD ) 223 . All three legislative texts have been applicable for over five years at the time of the review and the evaluation will cover the period since their introduction until the present. The three legislative texts contain review clauses anticipating a possible revision of the resolution framework, further harmonisation of insolvency law as well as a report on the progress concerning the implementation of depositor protection rules 224 . This evaluation also provides a state of play regarding the third pillar of the Banking Union. The Commission put forward a proposal for EDIS in 2015 225 which, to date, is still not agreed by the co-legislators, leaving the Banking Union incomplete.

This evaluation complements the impact assessment of the CMDI review and its conclusions feed into the problem definition. It is based primarily on the results of consultations with stakeholders, regular exchanges with experts from the Member States (Ministries of Finance, resolution authorities, deposit guarantee schemes authorities), reports from the EBA, studies commissioned by the European Parliament and exchanges with Members of the European Parliament, discussions with the European Central Bank ECB and the SRB – the central supervisory and resolution authorities in the Banking Union and additional desk research of the Commission services. A detailed description of the methods used to conduct this evaluation and inform the impact assessment for the review of the framework are provided in Section 5.

On the basis of the evidence and in line with better regulation principles, the framework was evaluated against five criteria: efficiency, effectiveness, relevance, coherence and added-value of EU action.

This evaluation concludes that the application of the framework brought important benefits in terms of maintaining financial stability, mainly through more robust crisis preparedness and contingency planning, enhanced banks’ resolvability, including through the build-up of resolution buffers and pre-funded deposit guarantee and resolution funds, improved market discipline and curbed moral hazard. The implementation of the framework significantly improved depositor protection and contributed to boosting, overall, consumer confidence in the EU banking sector.

Yet, the practical application failed to achieve some important objectives or achieved them only partially. Experience with the application of the CMDI framework from 2015 until now reveals that, while it can be a very effective tool in addressing problems of bank failures, in some areas, there is scope to improve its functioning. The Commission is therefore reviewing it as part of the work on completing the Banking Union. This review represents an opportunity to improve the functioning of the second pillar of the Banking Union (the Single Resolution Mechanism) to revisit areas of risks related to its application and ensure it is fit for purpose. It also aims to evaluate the need for and make progress on EDIS, the third and still missing pillar of the Banking Union.

The four opinions and reports 226 from the EBA on the implementation of the depositor protection rules also substantiate the need for clarifying a number of DGSD provisions and improving depositor protection and payout processes in the context of this review.

Considering the effectiveness criterion, two out of the four objectives of the framework have been evaluated as being partially achieved, while the others have not been achieved in a satisfactory manner, except in a limited number of cases. More specifically, the framework partially achieved its objective of containing risks to financial stability and protecting depositors, but it failed to achieve other key overarching objectives, notably enhancing the functioning of the single market and minimising recourse to taxpayer money. In a significant number of cases, the fulfilment of objectives cannot be directly attributed to the European framework, but to the application of tools at national level, outside of resolution and with recourse to public budgets and taxpayers’ funds. The management of bank failures differed across Member States, depending on the existing national regime, which raises questions about the coherence of the framework, resulting in sub-optimal outcomes for level playing field and the single market in banking.

Figure 12: Overview of effectiveness – traffic light analysis

Source: Commission services assessment.

Under the efficiency criterion, the evaluation found that the CMDI framework is not sufficiently cost-effective. On one hand, the main benefits of the framework include enhanced crisis preparedness, contingency planning, increased loss-absorption capacity in banks and the disciplining influence that the existence of the framework exerts on banks and markets. On the other hand, the operationalisation of the CMDI framework came with costs for the banking industry, Member States and resolution authorities. Yet, despite the costs, the framework and its tools and powers have been scarcely used in practice, especially in the Banking Union under the SRMR. The Single Resolution Fund (SRF) has remained idle so far and beyond the losses absorbed by the banks, deposit guarantee scheme (DGS) have been used often backed by public funds. In addition, the use of public funding in recent cases of bank failures indicates a redistribution of costs from banks’ senior unsecured creditors to the taxpayers, despite scrutiny on such usage of public funds through the EU State aid rules. Furthermore, available evidence suggests that these costs are uneven between Member States, as national requirements and practices diverge widely.

From a coherence perspective, further improvements are necessary to ensure a better internal interaction and consistency between the various pieces of legislation forming the CMDI framework, in particular the coherence between the CMDI framework and the State aid rules 227 most prominently in respect of access to funding requirements to support tools outside resolution, the Capital Requirements Directive (CRD) and the Single Supervisory Mechanism Regulation (SSMR) in what concerns the early intervention measures, the Anti-Money Laundering Directive (AMLD), the Payment Services and the E-money Directives in what concerns interactions with the DGSD.

The framework remains very relevant and adds EU value because cross-border crisis management cannot be left to the national level without consequence on public finances, the bank-sovereign nexus, the single market in banking and level playing field for banks, creditors, depositors and taxpayers. The addition of a common safety net such as EDIS would further boost the framework’s relevance and EU-value added.

Identified problems are grouped as follows:

·uneven playing field and uncertainty in the management of bank crisis situations – mainly driven by the lack of legal clarity and framing of the application of DGSD preventive measures and BRRD precautionary measures, broad legal discretion in the PIA when placing banks in resolution (under EU framework) versus insolvency 228 (under national rules), divergence in the triggers for national insolvency proceedings, divergence in the hierarchy of claims in national insolvency laws 229 , an inadequate early intervention framework and timeliness of the FOLF determination;

·ineffective funding options and divergent access conditions for the financing of resolution and insolvency – mainly driven by structural challenges for some banks in fulfilling the conditions to gain access to resolution funds/SRF, divergent requirements to access funding from the resolution fund and other sources of funding outside resolution and unclear rules to access DGS funding in resolution and insolvency;

·uneven and inconsistent depositor protection and lack of robustness in DGS funding – mainly driven by different national provisions as well as vulnerability to large shocks in national depositor protection in the Banking Union due to the lack of centralised safety nets (e.g. EDIS).

2.Introduction

Purpose of the evaluation

The focus of the evaluation is to assess whether appropriate tools and means exist to manage in an orderly manner the failure of all banks irrespective of their location, size or business model. In addition, it evaluates whether adequate mechanisms are in place to ensure depositor protection, in particular in the Banking Union considering the third missing pillar.

In line with better regulation principles, the evaluation of the EU CMDI framework seeks to assess the extent to which the requirements and the application of the framework have fulfilled the principal objectives in an efficient and effective way, while at the same time being coherent, relevant and providing EU added-value. In particular, with regard to effectiveness, the evaluation assesses whether the implementation of the framework has met its objectives and identifies the areas where there is room for improvement.

This retrospective evaluation was conducted back-to-back with the impact assessment and it feeds into the problem definition chapter. Where the framework fails to fulfil the policy objectives across these criteria, the review initiative aims to propose solutions to address identified issues that would enable the framework to achieve fully its objectives.

Scope of the evaluation

The scope of the evaluation covers all institutions and entities within the scope of the BRRD, SRMR and DGSD. It covers the measures preparing for and preventing bank failures, those applicable once a bank has been declared failing or likely to fail and those concerning depositor protection. In the area of prevention, the evaluation focuses on preventive measures under Article 32 of the BRRD (the so called “precautionary measures”), as well as on measures by the competent authorities (early intervention measures) to address financial deterioration at an early stage or to prevent a bank’s failure using funding from the DGS (preventive measures under Article 11(3) DGSD) subject to the safeguards set out in the DGSD. In the area of execution of resolution, the evaluation looks at the overall incentive set-up in bank crisis management, the determination to place banks in resolution or insolvency, the coherence of various triggers, the application of resolution tools, funding issues, including the use of DGS funding prior to resolution, in resolution and insolvency, the level of depositor protection and its vulnerability to financial shocks from the perspective of financial stability.

The updates to BRRD/SRMR adopted in 2019 230 are out of the scope of this evaluation, as they have only been applicable for a short period of time and the effects of their implementation are still to be observed.

3.Background to the initiative

The global financial crisis revealed structural issues accumulated in our inter-connected global financial system, some of which had wrongly been considered part and parcel of an inter-connected global financial system delivering deep markets and liquidity. Banks were generally undercapitalised and became highly leveraged in search for ever higher yields and return on equity, which the customer deposit funding model could not deliver. The maturity transformation function that banks had historically provided to the real economy became a point of weakness and fragility once short-term funding could not be extended to support long-term assets. Moral hazard and other agency issues were widely spread. When coupled with accelerated financial innovation and securitisation as well as regulatory forbearance, this generated substantial financial misconduct and poor management of risks.

The supervisory tools available at the time of the crisis did not capture this complexity nor addressed the underlying issues. They did not provide for well-structured action plans to deal with bank failures based on ex ante prepared scenarios. This forced regulators and supervisors into unchartered territory such as: massive bail-outs including through asset relief programs, capital injections, guarantees and provision of liquidity directly into the financial system, unprecedented "lender of last resort" operations, nationalisations as a temporary measure to stabilise systemic banks, or capital controls to reduce the effects of liquidity flight and buy time for devising restructuring and restoration plans.

Once the situation was stabilised, albeit with considerable burden for public finances (aid granted by the Member States between 2007 and 2014 amounted to EUR 671 bn in capital and repayable loans and EUR 1 288 bn in guarantees 231 ), significant reforms meant to address the root causes of the crisis were enacted, including to address poor capital adequacy ratios and loopholes in risk management practices, agency issues, the lack of resolution regimes and the insufficient depositor protection in some countries. This wave of measures set the foundation of the Banking Union and its pillars. The first pillar set up a Single Supervisory Mechanism (SSM) and implemented Basel III in Europe through the revised Capital Requirements Regulation and Directive (CRR/CRDIV) finalised in 2013. The second pillar set up a Single Resolution Mechanism (SRM), adopted the first recovery and resolution regime for banks (BRRD/SRMR) and revised the DGSD in 2014. The BRRD established an orderly resolution mechanism for all banks (including those with cross-border operations), requiring banks to build up internal loss-absorbing capacity and providing resolution authorities with comprehensive powers and tools (including a bail-in tool) to intervene when a bank meets the conditions for resolution. A legislative proposal by the Commission in 2015 for an EDIS, and which would constitute the Banking Union’s third pillar, is not yet adopted.

The BRRD was published in the Official Journal on 12 June 2014 and became applicable starting 1 January 2015. The provisions related to the bail-in tool became applicable from 1 January 2016. The SRMR was published in the Official Journal on 30 July 2014 and became applicable starting 1 January 2016 with the exception of some provisions which became applicable earlier. Technical aspects and the phase-in schedule of certain core requirements were further specified via implementing and delegated acts, including rules on: preparation of recovery and resolution plans 232 , determination of critical functions (contributing to the public interest assessment) 233 , conduct of the resolvability assessment, calibration of the MREL requirement 234 , valuation rules and calculation of contributions to national resolution funds and the SRF 235 .

The DGSD was published in the Official Journal on 16 April 2014 and most articles became applicable on 3 July 2015, following transposition, while other parts (depositors’ access to funds to cover the cost of living) became applicable on 31 May 2016.

Yet for all the post-crisis progress achieved, areas for further strengthening and adjustment were identified both with regards to the prudential and resolution frameworks. As a result, the Banking package (also known as the “risk reduction package”) proposed by the Commission in 2016 was adopted in 2019 236 . The Directive (EU) 2017/2399 (the so-called Bank creditor hierarchy Directive) amending the BRRD was adopted and published earlier in 2017 237 . Building on the previous prudential and resolution legislation, the 2019 Banking package included measures delivering on Europe's commitments made in international fora 238 and acted on the EU commitment to take further steps towards the completion of the Banking Union by providing credible risk reduction measures to mitigate threats to financial stability, as published in the European Commission's 2015 Communication 239 . This targeted update of the CMDI framework through the 2019 Banking package is out of scope of this evaluation due its recent entry into force. The effects of its implementation are still to be observed, in particular where transitional arrangements extend until 2024.

The general policy objectives of the CMDI framework are to: (i) limit potential risks of adverse effects for financial stability caused by the failure of banks, including by preventing contagion and ensuring market discipline and the continuity of critical functions for society 240 , (ii) minimise losses for society, in particular mitigate recourse to taxpayers’ money 241 and weaken the bank-sovereign nexus, (iii) enhance the functioning of the single market in banking, including by handling of cross-border crises and fostering a level playing field among banks from different Member States, particularly in the Banking Union 242 and (iv) protect depositors and ensure consumer confidence across the EU irrespective of the place of incorporation of the bank 243 .

Figure 13: General objectives of the CMDI framework

Source: Commission services.

The evaluation assesses the effectiveness of the framework with regard to these overarching general objectives of the BRRD/SRMR/DGSD as provided in the 2014 legislative texts.

The intervention logic (Figure 14) provides a description – in a summarised diagram format – on how the CMDI framework (BRRD/SRMR/DGSD and EDIS (as a third and still missing pillar in the Banking Union) was expected to work. It is also used to carry out the evaluation and answer specific questions.

Figure 14: Intervention logic

Source: Commission services

Description of the situation before the adoption of the CMDI framework

The baseline scenario, assuming the CMDI framework had not been adopted, is one in which the EU would continue to rely on the limited (or non-existing) EU legislation 244 and diverging national legislations and arrangements in situations of bank crises.

In terms of preparation and prevention, supervisors would continue to rely on previous practices for detecting risks at credit institutions. In the absence of contingency plans, they would lack key information about the possible de-risking strategies of credit institutions or about their recovery or resolution possibilities (including their financing). Authorities would not have any power to ask overly complex, large or interrelated institutions to reorganise or simplify their operations, which could be a major hurdle in a possible resolution. This would entrench moral hazard risk in banks that are too big, complex or interconnected to fail.

In the case of early intervention by supervisors, the absence of the initiative would mean that supervisors in different Member States would have different powers and intervention tools for different members of the same cross-border banking group. They would be required to intervene at different times, under different conditions and implement different measures, leading to uneven playing field, ring fencing of resources and highly inconsistent outcomes, likely triggering contagion to other members of the group located in different Member States.

If no special bank resolution tools and powers were granted to authorities, the resolution of banks (i.e. allocating losses and preserving the critical functions in the bank under an administrative procedure) would be impossible to execute and bail-out would remain the only alternative. If authorities could intervene in certain countries only when banks are formally insolvent, those countries would bear much higher social cost stemming from banks’ failure.

The lack of an EU framework would also represent a source of distortion in the internal market. Faced with a cross-border bank insolvency, different national authorities would continue to focus only on the respective legal entity located in their territory. Conflicting interests would likely impede a more optimal reorganisation solution for the group as a whole, taking into consideration the interest of all Member States. National solutions with divergent and inadequate resolution tools would likely be costlier for citizens and taxpayers than if the failure of banking groups was governed by comprehensive rules and arrangements and, in the case of the Banking Union a central authority (SRB). There would be no private resources (resolution funds) raised from the industry to finance resolution. This accordingly means continuing to rely on prudential capital buffers at the level of individual institutions and DGS to the extent that these are able to finance resolution measures. If losses would not be covered by those means and in view of possible DGS shortfalls, recourse to public funds may continue to be the only option for governments to safeguard financial stability and protect depositors.

From a DGSD perspective, in the baseline scenario, the objectives of protecting depositors, preventing bank runs and contributing to financial stability would not be fully met. While the coverage level was already fixed at EUR 100 000, the risk of bank runs and its economic consequences would not be avoided or reduced, because of the long payout delays 245 by national DGS and the lack of financial capacity of some schemes. Further, the potential of the internal market would be hampered by fragmentation and a lack of coordination. A varying scope of covered products and different eligibility criteria for protected depositors in the EU, combined with the lack of information on whether deposits are covered, would lead to depositors searching for the 'best DGS' when depositing their money instead of looking for the 'best product' or 'best service'. This and the lack of mutual cooperation between schemes in cross-border situations and the perspective of having to deal with a DGS in another language 246 would lead to choosing between domestic banks only.

Banks, in particular those operating cross-border, would still suffer from an unlevel playing field due to divergent ex post and ex ante contribution systems implying they would have to pay high contributions in one Member State, but none in another one so long as there is no bank failure. In the latter case, they would have to provide funding to the DGS in times of general stress on banks’ liquidity. Banks would also suffer from adverse selection, if a sound and prudent bank had to pay the same contributions as a bank of the same size operating under an aggressive business model at the margin of prudential regulation and incurring higher risks.

4.Evaluation questions

This section summarises the review questions addressed in this evaluation.

Question 1 - How effective has the EU intervention been? What have been the effects of the EU intervention?

·To what extent have the general objectives of the CMDI framework (BRRD/SRMR/DGSD) been achieved and what factors were relevant in that regard?

Question 2: How efficient has the EU intervention been?

·To what extent have the rules regarding the recovery and orderly resolution of banks under the BRRD/SRMR and the ones regarding depositor protection under the DGSD been cost-effective? Are there significant differences in costs or benefits between Member States and what is causing them?

Question 3: How relevant is the EU intervention?

·To what extent are the rules still relevant and how well do the original objectives of these legislative initiatives (BRRD/SRMR/DGSD) correspond to the current needs within the EU?

·To what extent do the risks to financial stability stemming from bank crises continue to require action at EU level?

·Have new challenges arisen which were not existent at the time of introduction of the CMDI framework and which need to be tackled by the framework?

·How is the absence of a common depositor guarantee scheme for depositors, in the Banking Union, such as EDIS affect the relevance of the framework?

Question 4: How coherent is the EU intervention?

·To what extent are rules on the recovery and resolution of banks and depositor protection in the BRRD/SRMR/DGSD coherent as a framework, is the framework coherent with provisions in other pieces of relevant legislation or communications, in particular State aid rules, national insolvency regimes, the CRD, AML/e-money, payment services and E-money Directives?

Question 5: What is the EU-added value of the intervention?

·Compared to the previous national approaches, to what extent have the provisions of CMDI framework (BRRD/SRMR/DGSD) helped improve the functioning of the single market in banking, contributed to financial stability and increasing the level playing field among banks, and consumer confidence taking into account the inherent cross-border nature of banking in the EU?

·How does the gap of the third missing pillar of the Banking Union (common depositor protection) affect the EU-added value of the framework?

5.Method

This evaluation draws on a broad range of information sources such as results of consultations with stakeholders (e.g. two public consultations, high-level conference, bilateral meetings), exchanges with Member States (e.g. expert group meetings, ad-hoc working party meetings, bilateral meetings), pilot studies of the EP, exchanges with relevant authorities (ECB, SRB and EBA), reports from the EBA (e.g. opinions, a call for advice, reports, discussion papers), reports from the JRC and additional desk research of the Commission services. A detailed list of all specific sources can be found in Annex 1 of the impact assessment.

Limitations

First, the current evaluation of the effectiveness and efficiency of the CMDI framework is conducted while certain aspects of the framework are still in a transitional period. For instance, banks are still building their resolution buffers (MREL compliance with BRRD II requirements is expected by 2024 for most banks) and the resolution funds/SRF/DGS will have reached their target level by 2024 247 . Banks are also making progress in improving their resolvability. Resolution authorities continuously improve resolution planning and monitoring resolvability, updating internal policies, in particular on the rules regarding the MREL, setting requirements for resolution entities and subsidiaries in banking groups, enhancing their preparedness for the application of resolution action, collecting contributions to the resolution funds/SRF and relevant data to conduct their work. In addition, some of the crisis cases that occurred since the entry into force of the framework were legacy situations, with their own particularities. However, these aspects are taken into account, when forming conclusions on the evaluation of the framework.

Second, it is not always possible to attribute observed outcomes to the CMDI reforms. The evaluation has sought to establish a causal link between the reforms and observed outcomes. However, some CMDI reforms were only recently implemented, other reforms have been implemented in parallel, and the evolution of monetary policy may have affected the evolution of key considerations regarding for instance the preservation of financial stability and depositor confidence.

Third, certain aspects of this evaluation pertaining to the funding issues of the framework were analysed based on data as of Q4 2019 (banks’ liability structure). A dynamic analysis showing the implementation progress over several reporting periods was not feasible, due to lack of data and a lack of comparability owing to the significant evolution in MREL methodology and sample coverage, over the past years 248 . The database also did not capture the impact of the COVID-19 pandemic on the banking sector. This was because existing data collection schedules set by resolution authorities and the EBA did not allow for more recent data. However, certain additional information pertaining to the MREL targets, issuances and shortfalls available as of Q3 2022 and more generally, certain qualitative considerations regarding the impact of the COVID-19 crisis have been integrated in the analysis in order to partially mitigate this caveat. Similarly, new supervisory reporting requirements for banks came into force with the adoption of the relevant secondary legislation in 2021, and public disclosure of MREL will be required from 2024 onwards 249 . Nevertheless, the evaluation draws from the data collected by European public authorities and bodies (i.e. SRB, EBA) on the basis of rules, which were in place when the analysis was conducted, as well as the responses to the public consultations. For a comprehensive view, please refer to Annexes 7 and 13 of the impact assessment.

Fourth, the database which informed the quantitative analyses for this evaluation and impact assessment reflects a limited sample of EU banks, while remaining nevertheless a representative subset (see Annex 7 for details). Additionally, some evidence provided in this evaluation is drawn from SRB sources of data only, meaning that it is only limited to banks under its remit and it does not cover less significant institutions in the Banking Union and other non-Banking Union banks.

6.Implementation State of play (results)

Overview of requirements in place 250

The CMDI framework is in force since 1 January 2015 for the BRRD (except the bail-in provisions which came into effect one year later), 1 January 2016 for the SRMR and 3 July 2015 for the DGSD with the exception of certain provisions, which became applicable on 31 May 2016.

The framework provides for a set of instruments that can be used before a bank is considered failing or likely to fail (FOLF). These allow a timely intervention to address a financial deterioration (early intervention measures) or to prevent a bank’s failure (preventive measures under the DGSD or precautionary measures under the BRRD). In particular, the CMDI framework includes measures that could be used in exceptional circumstances of serious disturbance to the economy. In these circumstances, it allows external financial support for precautionary purposes (precautionary measures) to be granted.

When a bank is considered FOLF and there is a public interest in resolving it, 251 the resolution authorities will intervene in the bank, absent of a private solution, by using the specific powers granted by the BRRD 252 . In the Banking Union, the resolution of significant institutions (or cross-border less significant institutions) with a positive public interest assessment is carried out by the SRB. In the absence of a public interest for resolution, the bank failure should be handled through winding-up under normal insolvency proceedings available at national level.

The CMDI framework provides for a wide array of tools and powers in the hands of resolution authorities as well as rules on the funding of resolution actions. These include powers to sell the bank or parts of it, to transfer critical functions to a bridge institution and to transfer non-performing assets to an asset management vehicle. Moreover, it includes the power to bail-in creditors by reducing their claims or converting them into equity capital, to absorb the losses of the bank and recapitalise it to the extent required.

When it comes to funding, in order to reduce moral hazard, the overarching principle is that the bank should first cover losses with private resources (through the reduction of shareholders’ equity and the bail-in of creditors’ claims) and that external financial support can be provided only after certain requirements are met (access requirements to resolution funds and DGS). In line with their resolution strategy and preferred tools (e.g. open bank bail-in, sale of business, bridge banks, asset separation), banks are required by resolution authorities to hold MREL instruments in an amount determined in order to facilitate the execution of the selected strategy. The primary sources of external financing of resolution actions (should the bank’s own resources be insufficient) are provided by a resolution fund and the DGS, funded by the banking industry, rather than taxpayers’ money. Other (public) sources of external funding are possible under certain conditions. In the context of the Banking Union, for banks under the SRB remit, funding was further integrated by providing for a Single Resolution Fund (SRF) composed of contributions from credit institutions and certain investment firms in the participating Member States of the Banking Union. However, a common deposit guarantee scheme in the Banking Union is still missing.

Deposits are protected up to EUR 100 000 regardless of whether the bank is put into resolution or insolvency. In insolvency, the primary function of a DGS is to pay out depositors within seven days of a determination of unavailability of their deposits. In line with the law, DGSs may also have functions other than the payout of depositors. As payout may not always be suitable in a crisis scenario due to the risk of disrupting overall depositor confidence 253 , some Member States allow the DGS’ funds to be used to prevent the failure of a bank (preventive measures) or finance a transfer of assets and liabilities to a buyer in insolvency to preserve the access to covered depositors ( alternative measures). The DGSD provides a limit as regards the amount of funds allowed to be used for such preventive and alternative measures. Moreover, DGSs can contribute financially to a bank’s resolution, under certain circumstances.

State of play of transposition of the Directives (BRRD/DGSD)

Both Directives have been transposed in all Member States.

The transposition deadline for the BRRD was 31 December 2014. Only two Member States notified complete transposition of the BRRD within that deadline. To date, all Member States have notified complete transposition and the respective infringement cases for non-communication were closed. The deadline for DGSD transposition expired on 3 July 2015 and all Member States notified a complete transposition 254 . The Commission has verified that the BRRD and the DGSD are fully transposed in all Member States. The Commission is currently concluding its verification of the correctness of national transposition measures, with only a limited number of outstanding issues concerning a small group of Member States needing to be finalised.

State of play of implementation of the resolution framework by resolution authorities

The implementation of BRRD/SRMR is ongoing in the EU. Since its introduction, a number of resolution colleges were set up with the objective to jointly agree resolution plans, conduct resolvability assessments and set MREL requirements among home and host authorities in charge of resolving banking groups in the EU 255 . In the Banking Union, the SRB is carrying out the process of preparing resolution plans and, when the need arises, executing resolution actions for banks under its remit.

In terms of coverage, resolution planning, resolution strategies and MREL targets have been set by resolution authorities for the majority of banks under their remit. This has allowed banks to make progress on removing impediments to resolvability and build-up MREL buffers. While good progress has been achieved to date by authorities in setting external MREL requirements and by resolution entities in issuing eligible instruments on the market, the setting of internal MREL requirements for subsidiaries in groups following a single point of entry (SPE) resolution strategy and the pre-positioning of this capacity within groups is still ongoing, following a phased approach.

Since its inception in 2015, the SRB prepared resolution plans for most banks under its remit (104 resolution plans for EU banks) 256 . 

Table 1: Overview of resolution planning for the Banking Union