European Parliament approves new rules on banking crises: “Stronger protection for taxpayers”

Brussels – The mini-plenary session of the European Parliament meeting today (26 March) in Brussels definitively adopted a new package on the orderly resolution of failed banks to enhance the protection of taxpayers and depositors during crises. The rules – adopted by announcement and without a vote, given the lack of amendments – are organised into three separate legislative acts: Bank Recovery and Resolution Directive (BRRD), the Single Resolution Mechanism Regulation (SRMR), and the Deposit Guarantee Schemes Directive (DGSD).

First of all, as stated in the Parliament’s official press release, the measures adopted today aim to “strengthen the protection of taxpayers’ money in the event of banking crises” by establishing a new order of priority for receiving reimbursements. The general rule remains that deposits up to 100,000 euros per account holder and per bank are fully covered, but the new DGSD stipulates that, during bankruptcy or resolution proceedings, the so-called deposit guarantee schemes (SGDs) will have priority in repayment. SGDs are funds that banks finance themselves to protect depositors in the event of a credit institution’s failure. Under the new rules, only after the SGDs have reimbursed account holders and small and medium-sized enterprises (SMEs) will it be possible to move on to other types of creditors (in particular, small public authorities, such as local councils and regional authorities). 

With the same aim of increasing guarantees for retail depositors during banking crises, the new DGSD introduces a further change regarding repayments exceeding 100,000 euros, which were previously not covered by European rules. “Beyond the standard EU guarantee of €100,000 per depositor per bank, certain deposits linked to real estate transactions will also be protected, ranging from €500,000 up to €2,500,000 depending on the circumstances,” according to the press release. In simpler terms, if an account holder has over 100,000 euros in their account as a result of the sale of a property, they will still be protected in the event of the bank’s failure. 

Another key part of the package adopted this morning concerns changes to the requirements that banks must meet to qualify for so-called “public bail-out” operations. Under the new rules, to access external funds, a failing bank’s own investors and creditors must first absorb losses equivalent to at least 8 per cent of the bank’s total liabilities and own funds (TLOF). In other words, credit institutions must first cover part of the losses using “internal” resources, and only then may they seek state aid. “This mechanism strengthens safeguards for citizens, SMEs and local authorities”, emphasised Ludek Niedermayer, a Czech MEP and rapporteur for the BRRD, explaining how this helps to “clarify how their funds will be treated in the event of a bank failure” and to “reduce the use of taxpayers’ money, promoting market-based solutions and private financing mechanisms”. In addition, MEPs called for simplifying the use of the “bridge the gap” mechanism, particularly for smaller banks, under which DGSs can be used to help reach the 8 per cent threshold when this is not possible using only the resources of creditors and investors.

A final aspect of the package concerns the broadening of the “scope” of banks to which stricter procedures will apply in the event of failure. Until now, all measures designed to manage the situation in an orderly manner and protect customers (from the sale of the bank to the creation of a temporary “bridge bank”) were mandatory only for the largest credit institutions. Under the new rules, however, small and medium-sized banks – if they are of public interest – will also have to follow the same procedure. “The reform of bank crisis management and deposit insurance framework marks a decisive improvement, making resolution more credible and accessible for small and medium-sized banks,” said PD MEP and rapporteur for the SRMR, Irene Tinagli.

 The third co-rapporteur, Kira Marie Peter-Hansen, also highlighted the achievement of “an important first step towards the completion of the banking union.” Nevertheless, she added, “more ambitious action will be needed to finally complete the banking union, including a fully-fledged European deposit insurance scheme.”