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EU lawmakers have reached a long-awaited political agreement to revamp how the bloc manages failing banks, in a move aimed at bolstering financial stability and minimising the impact on taxpayers.
The deal, struck late on Tuesday between EU countries and the European parliament, updates the EU’s crisis management and deposit insurance framework, a cornerstone of the bloc’s post-financial crisis banking reforms.
The compromise was “a significant step forward in our efforts to strengthen financial stability, protect depositors, and avoid burdening taxpayers’ money when banks fail”, said Maria Luís Albuquerque, EU commissioner for financial services.
The compromise is designed to make resolution procedures more predictable and applicable to small and medium-sized banks, which have often been wound down through national insolvency regimes instead of the EU’s own tools.
“This important reform has the potential to enhance the current framework by providing more options for dealing with smaller and mid-sized banks in crisis,” said the Single Resolution Board, which handles failing banks in the EU.
At the heart of the agreement is the expanded use of industry-funded safety nets — namely, national deposit guarantee schemes and, in the Eurozone, the Single Resolution Fund — to help cover the costs of resolving smaller banks. These funds can now be used to “bridge the gap” when a bank lacks sufficient loss-absorbing capital, avoiding the need to bail in depositors or to resort to state bailouts.
However, the use of such funds will be subject to strict safeguards, added at the behest of countries including France and Germany, home to some of the bloc’s largest banks, which pushed back against using safety nets funded by the industry to avoid moral hazard.
Resolution authorities will continue to prioritise the bank’s minimum capital and eligible liabilities — a layer of loss-absorbing debt designed to be wiped out in a crisis — as the primary line of defence, while ensuring that support from deposit guarantee schemes is only used as a “last resort” and stays within the limits of the covered deposit base.
The revised rules also refine the public interest test that determines whether resolution is preferable to liquidation. New criteria allow resolution authorities to take more account of regional economic disruption, a common feature of smaller banks, making resolution a more viable option while keeping liquidation as the default route.
The legislation also standardises the “least cost test” for accessing deposit guarantee scheme resources and confirms the hierarchy of depositor claims, preserving the primary protection of covered deposits and adding a second tier for uncovered deposits from households and SMEs.
“Today’s deal is a proof that the co-legislators are willing to foster European integration, by creating a framework that enables more resolution, more access to the Single Resolution Fund . . . and paves the way to reduce national solutions and opt for a harmonised framework,” said Aurore Lalucq, chair of the parliament’s economic affairs committee.
