RegCORE Client Alert | Banking Union
QuickTake
Legislative proposals to reform the EU's bank crisis
management and deposit insurance (CMDI) framework
(the Proposals)
were adopted by
the European Commission (the Commission) in April
2023, as covered in an earlier Client Alert by PwC Legal's EU
RegCore. The Proposals are comprised of a l egislative package
of targeted amendments to the currently applicable banking recovery
and resolution regime, as composed of the Bank Recovery and
Resolution Directive (BRRD), the Single Resolution
Mechanism Regulation (SRMR) and the Deposit
guarantee Schemes Directive (DGSD). In addressing
a set of deficiencies in the current regime, the Proposals aim to
make it easier for authorities to organise an orderly market exit
for a failing bank of any size and business model. One year later,
the question arises as to where we stand?
After the European Parliament Economic and Monetary Affairs (ECON) Committee held its first exchange on the Proposals on 20 September 2023, agreement on a final landing zone on the compromise as regards the deposit guarantee scheme (DGS) part of the CMDI reform package was reached in the European Parliament (the Parliament) over the weekend of 10 March 2024. The final (non-public) text on the compromise now secured provides an indication of the future direction of travel and what to expect from the CMDI framework going forward, also in terms of progress on completing the Banking Union more broadly.
Still earlier in March 2024, the ECON Committee reintroduced the Esther de Lange Report on the establishment of a European Deposit Insurance Scheme (EDIS) and is now, under rapporteur Othmar Karas (EPP, Austria), once again, aiming to reiterate the Parliament's support for EDIS, in the form of a draft Resolution, crucially also as part of the broader CMDI framework in order to complete the Banking Union. While this renewed legislative push starkly juxtaposes the market turmoil in the US and Switzerland one year prior, only time will tell whether rapporteur Karas will be able to garner more political consensus on EDIS than his Dutch predecessor de Lange. For a more comprehensive overview of the issues and challenges related to the establishment of EDIS, visit PwC Legal's earlier EU RegCORE Client Alert as part of the Banking Union series. This Client Alert provides a general overview of the final compromise now reached on the DGSD as part of the CMDI framework, in the Parliament.
Key takeaways
As the Commission has pointed out, it is conceivable that the
adoption of the CMDI reforms together with the finalisation of the
Banking Union, including the establishment of a EDIS as its third
(and final) pillar, would significantly increase the level of
financial protection to and confidence among EU households and
businesses. As mentioned in
the Explanatory Memorandum of the Proposals, this would create a
solid foundation of trust and bolster financial stability as
essential prerequisites for fostering growth, prosperity, and
resilience within the Economic and Monetary Union (i.e. the euro
area) and the EU more broadly.
A small "reality check" reveals, however, that no
significant progress appears to have been made since Eurogroup
President Donohue's letter to the European Council back in
December 2020 as to overcoming the currently still looming
dead-lock on reaching political consensus on EDIS. One and a half
years later, in June 2022, the Eurogroup invited the Commission to
advance legislative proposals specifically targeting the CMDI
framework, that is, the BRRD, SRMR and DGSD, and thereby notably
not agreeing on a more comprehensive roadmap for completing the
Banking Union by including EDIS.
Since the entry into force in 2014, the objective of the DGSD has been the harmonisation of rules concerning the functioning of DGS in order to protect depositors of all credit institutions, as well as to safeguard the stability of the EU banking system as a whole. To do so, at least one DGS was set up in every Member State such as to ensure fast reimbursement of depositors in the event of bank failures (payout). To that end, the Directive also requires every credit institution to join a DGS in its Member State.
As a result of the DGSD, depositors within the Single Market
greatly benefitted from access to DGSs, in part, due to a broadened
and clarified scope of coverage, faster repayment periods, improved
information and robust funding requirements. Moreover, DGSs are
a crucial element to the prudential supervision of credit
institutions in that they create solidarity between all
institutions operating in the Single (financial) Market should one
of them fail, regardless of their Member State of origin.
The beneficiaries of the coverage provided under the DGSs under
the currently applicable DGSD are essentially all deposits held by
individuals and companies whatever their size. With the exception
of small local authorities, the deposits of financial institutions
and authorities are not covered. Notably, the deposits in non-EU
currencies are also within the scope of coverage, which is
important for small and medium-sized companies by virtue of their
being active in several non-EU countries. Another crucial function
of DGSs is their role in the crisis management of banks. By their
ability to contribute to resolution or other – interim
– measures, they allow for depositor access to covered
deposits to be preserved.
The currently applicable coverage level, that is EUR 100,000,
applies per depositor per credit institution. In other words, the
limit of EUR 100,000 applies to all aggregate accounts at the same
bank, although for joint accounts (such as those belonging to a
couple) the limit applies to each depositor. Certain other specific
deposits, for example those linked to life events such as marriage,
divorce, retirement, redundancy, invalidity or death, may be
protected above the EUR 100,000 level but for a limited period of
time (i.e., a minimum of 3 months and a maximum of 12 months).
Notwithstanding the above and generally positive benefits for
depositors thus far, the Commission confirmed in the Proposals that
practical experience in applying the framework provided by the DGSD
has given rise to areas for improvement. One area as such is the
conceivably divergent interpretation of conditions for the use of
DGS funds for interventions outside the payout of covered deposits,
that is the scope of the function of DGSs to perform the other
– interim – measures, as mentioned above, besides the
payout of covered deposits.
The targeted amendments to the DGSD under the Proposals as such
are primarily based on the recommendations as set out in the five
opinions published by the European Banking Authority (EBA) in
supporting the Commission in the fulfilment of its mandate under
Article 19(6) DGSD to evaluate the performance of the DGSD.
Accordingly, the Proposals aim to address a range of policy aspects part of the CMDI reform as response to the shortcomings identified by the Commission evaluation. Specifically, the Proposals aim "to;
- Clarify the scope of depositor protection by addressing identified discrepancies to offer EU depositors a harmonised and robust level of protection;
- Harmonise the least cost test for all types of DGS interventions outside the payout of covered deposits in insolvency, to improve the level playing field and ensure consistency of outcomes when managing bank failures;
- Improve the functioning of DGSs by simplifying administrative procedures, while improving the transparency of their financial robustness and use of funds;
- Increase the convergence in DGS practices and among authorities; and
- Improve cross-border cooperation between DGSs in reimbursing
depositors located in other EU Member States, or in case of
exchange of DGS affiliation by banks."
The final compromise which has now been reached in Parliament on the DGS part of the Proposals, includes, amongst others, agreements on:
- the minimum (and maximum) levels of protection DGSs are to ensure in the Member States. In the non-public version of the final text compromise reached in Parliament, Article 6 DGSD is amended such that Member State ensure a minimum deposit guarantee of EUR 500,000 and a maximum of EUR 2.500,000, thereby removing the EU-wide harmonised approach;
- the scope of deposits covered by the DGSs in the Member States. According to the final text, the scope of coverage extends to small-and-medium-sized-enterprises (SMEs) and other senior deposits as set out by the national insolvency hierarchy;
- the corrective measures to be taken by DGSs in the Member States. Under the compromise reached, DGSs shall take corrective measures where the level of funding falls below 40%. Where the level of funding falls below 1/3rd, the replenishment must be completed within two years;
- the possibility for DGSs to lend to each other remains maintained under the final text, in line with the Karas draft Resolution on EDIS;
- the ongoing requirements for institutional protection schemes (IPS) and respective mandates for technical standards on their functioning. The IPSs are set to become subject to internal controls and greater transparency under the final text. Moreover, the bespoke DGSD will empower EBA and the Commission to adopt regulatory technical standards (RTS) on the functioning of the IPSs. The least cost test will also become applicable in the case of an IPS;
- restructuring and remediation plan requirements for credit institutions when tapping into a DGS to demonstrate their long-term viability. In these cases, the DGS is to only cover any funding gaps. The restructuring plan can be reviewed by the resolution authority, which can also make recommendations. Interestingly, the final text leaves open whether this could also include liquidity support;
- excluding public support access to DGSs; and
- subjecting third-country branches to DGS contributions.
Outlook and next steps
With EDIS being taken off the CMDI reform package, for now, it remains to be seen how the Proposals and specifically the targeted amendments to the DGSD will be able to unfold their potential, especially as regards the improved application of tools already available in the deposit protection framework, if ultimately adopted.
Concurrently, the Parliament is advancing discussions on the renewed effort behind EDIS, in the form of the draft Resolution under rapporteur Othmar Karas. While the next debate on the draft Resolution is planned for 20 March 2024, stay tuned on PwC Legal's EU RegCRORE microsite for further updates covering legislative and regulatory developments around the Banking Union. Whether and in how far the ca. 320 amendments, which have been tabled to that draft Resolution, will be capable of coherently complementing the CMDI framework, and the Banking Union more broadly, equally remains to be seen, as political consensus around risk sharing and reduction persists as significant headwind.
About us
PwC Legal is assisting a number of financial services firms and market participants in forward planning for changes stemming from relevant related developments. We have assembled a multi-disciplinary and multijurisdictional team of sector experts to support clients navigate challenges and seize opportunities as well as to proactively engage with their market stakeholders and regulators.
Moreover, we have developed a number of RegTech and SupTech tools for supervised firms, including PwC Legal's Rule Scanner tool, backed by a trusted set of managed solutions from PwC Legal Business Solutions, allowing for horizon scanning and risk mapping of all legislative and regulatory developments as well as sanctions and fines from more than 1,500 legislative and regulatory policymakers and other industry voices in over 170 jurisdictions impacting financial services firms and their business.
Equally, in leveraging our Rule Scanner technology, we offer a further solution for clients to digitise financial services firms' relevant internal policies and procedures, create a comprehensive documentation inventory with an established documentation hierarchy and embedded glossary that has version control over a defined backward plus forward looking timeline to be able to ensure changes in one policy are carried through over to other policy and procedure documents, critical path dependencies are mapped and legislative and regulatory developments are flagged where these may require actions to be taken in such policies and procedures.
