kom (2023) 0228 - Ingen titel

Europaudvalget 2023
KOM (2023) 0228
Offentligt

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}

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Table of contents

GLOSSARY ...................................................................................................................... III

INTRODUCTION: POLITICAL AND LEGAL CONTEXT................................... 12

PROBLEM DEFINITION ........................................................................................ 19

2.1. Problem 1: Insufficient legal certainty and predictability in the

management of bank failures ............................................................................. 23

2.2. Problem 2: Ineffective funding options and divergent access to funding

conditions in resolution and outside resolution ................................................. 28

2.3. Problem 3: Uneven and inconsistent depositor protection and lack of

robustness in DGS funding ................................................................................ 33

2.4. How will the problems evolve? ......................................................................... 35

WHY SHOULD THE EU ACT? .............................................................................. 36

3.1. Legal basis ......................................................................................................... 36

3.2. Subsidiarity: Necessity and added-value of EU action ...................................... 36

OBJECTIVES: WHAT IS TO BE ACHIEVED? ..................................................... 41

4.1. General objectives.............................................................................................. 41

4.2. Specific objectives ............................................................................................. 41

WHAT ARE THE AVAILABLE POLICY OPTIONS? .......................................... 41

5.1.

5.2.

5.3.

5.4.

5.5.

5.6.

Approach to design of policy options ................................................................ 41

Review of the 2013 Banking Communication on State aid rules ...................... 42

What is the baseline from which options are assessed?..................................... 43

Overview of the policy options .......................................................................... 45

Common elements across the packages of options ............................................ 45

Options discarded at an early stage.................................................................... 46

WHAT ARE THE IMPACTS OF THE POLICY OPTIONS AND HOW DO

THEY COMPARE? .................................................................................................. 46

6.1. Assessment of policy options ............................................................................ 47

6.2. Comparison and choice of preferred options ..................................................... 82

6.3. Common elements across the packages of options ............................................ 84

PREFERRED OPTION ............................................................................................. 85

HOW WILL ACTUAL IMPACTS BE MONITORED AND

EVALUATED? ......................................................................................................... 92

ANNEX 1: PROCEDURAL INFORMATION ................................................................ 95

ANNEX 2: STAKEHOLDER CONSULTATION ......................................................... 101

ANNEX 3: WHO IS AFFECTED AND HOW? ............................................................. 113

ANNEX 4: ‘ZOOM-IN’ ON CORE ELEMENTS OF THE CRISIS

MANAGEMENT AND DEPOSIT INSURANCE FRAMEWORK ...................... 126

ANNEX 5: EVALUATION OF THE CMDI FRAMEWORK....................................... 140

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ANNEX 6: OVERVIEW OF DEPOSIT INSURANCE ISSUES COVERED IN

THE IMPACT ASSESSMENT............................................................................... 215

ANNEX 7: ANALYTICAL METHODS ........................................................................ 237

ANNEX 8: IMPACT ASSESSMENT OF TECHNICAL TOPICS THAT WERE

NOT EXHAUSTIVELY COVERED IN THE MAIN BODY OF THE

IMPACT ASSESSMENT ....................................................................................... 315

ANNEX 9: SELECTED CASES OF APPLICATION OF THE CMDI

FRAMEWORK SINCE 2015 ................................................................................. 349

ANNEX 10: RATIONALE AND DESIGN FEATURES FOR A COMMON

DEPOSITOR PROTECTION IN THE BANKING UNION .................................. 358

ANNEX 11: EBA RESPONSE TO THE CALL FOR ADVICE ................................... 384

ANNEX 12: ANALYTICAL WORK BY THE JOINT RESEARCH CENTRE ........... 385

ANNEX 13: OTHER QUANTITATIVE ANALYSES .................................................. 386

ANNEX 14: OPTIONS DISCARDED AT AN EARLY STAGE .................................. 413

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LOSSARY

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.

Term or acronym

Alternative funding arrangements

Meaning or definition

Member States must ensure that DGSs have adequate alternative

funding arrangements in place to enable them to meet any claims

against them (Article 10(9) DGSD). These alternative funding

arrangements can, for instance, include temporary State financing

(which will ultimately be repaid by the DGS). DGSs can also raise

extraordinary contributions from those institutions covered by the

DGS where they do not have enough money immediately available

in their fund. DGSs can also choose to establish borrowing

arrangements between themselves, provided the respective

national law provisions allow them to do so.

DGS have in some Member States in the context of national

insolvency proceedings the capacity to intervene with other

modalities than direct payout as allowed in Article 11(6) DGSD.

Such measures intend to preserve the access of depositors to

covered deposits, including transfer of assets and liabilities and

deposit book transfer. A condition for such measures is that the

costs borne by the DGS do not exceed the net amount of

compensating covered depositors at the credit institution

concerned.

Anti-Money Laundering/Combating the Financing of Terrorism

Anti-Money Laundering Directive

An asset is encumbered if it has been pledged or if it is subject to

any form of arrangement to secure, collateralise or credit enhance

any transaction from which it cannot be freely withdrawn.

Additional Tier 1

AT1 is a component of Tier 1 Capital and it encompasses

instruments that are perpetual in nature and may be automatically

written-down or converted into CET1.

A bail-in is a legal procedure that may be used in bank resolution.

Carrying out a bail-in means that the claims of shareholders and

certain creditors in a bank are written-down or converted into

capital, meaning that they are forced to accept losses incurred by

the bank and to contribute to its recapitalisation.

A bail-out involves the rescue of a financial institution through the

intervention of the government using taxpayers’ money for

funding.

The 2019

Banking package

(also referred to as the “risk reduction

package”) amends the BRRD as regards the ranking of unsecured

debt instruments in insolvency hierarchy. It also implements in the

CRR II, the SRMR II and the BRRD II the minimum Total Loss-

Absorbing Capacity (TLAC) requirement for EU G-SIIs and

includes a revision of the MREL requirement for all banks with

strengthened eligibility and subordination criteria. These

amendments were adopted in 2019.

Alternative measures (in insolvency)

AML/CFT

AMLD

Asset encumbrance

AT1

Bail-in

Bail-out

Banking Package

III

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BRRD

billion

Bank recovery and resolution Directive

A directive establishing a common framework of rules and powers

for EU Member States to intervene in the case of failing banks.

The directive gives broad powers to national authorities to

prevent, intervene early and conduct the resolution of troubled

banks. Such powers include selling the bank (in whole or in

parts), setting up a temporary bridge bank, and bailing-in

shareholders and creditors of the bank.

Burden sharing is generally referred to when losses in a bank are

borne by the bank’s shareholders and creditors.

Central Credit Union

Credit Default Swap

A CDS is a financial swap agreement that the seller of the CDS

will compensate the buyer in the event of a debt default (by the

debtor) or other credit event.

Centre for European Policy Studies

Common Equity Tier 1

CET1 is a component of Tier 1 Capital, and it encompasses

ordinary shares and retained earnings.

The level of CET1 equity absorbing losses prior to the

determination of a bank as FOLF

Call for advice

Crisis management and deposit insurance

References to the CMDI framework in the impact assessment

relate to the harmonised EU rules in the BRRD/SRMR and DGSD,

while national insolvency proceedings, which are unharmonized,

are outside of the framework. However, the decision by the

resolution authority whether to place a failing bank in resolution

or in national insolvency proceedings is part of the CMDI

framework (public interest assessment). The CMDI framework,

through the DGSD, also encompasses preventive measures (under

Article 11(3) DGSD) and alternative measures in insolvency

(under Article 11(6) DGSD) as national options, which are only

available in national laws in a minority of Member States and

regulates the access conditions for these measures (such as the

least cost test)

Capital markets union

The capital markets union is a Commission initiative to create a

single market for capital, in order to get investments and savings

flowing across the EU so that they can benefit consumers,

investors and companies, regardless of where they are located.

In the event that the Single Resolution Fund is depleted, the

European Stability Mechanism can act as a common backstop. It

can lend the necessary funds to the SRF to finance resolution by

providing a revolving credit line. The aim of the common backstop

is to strengthen the resilience and crisis resolution capacity of the

Banking Union.

The part of the eligible deposits that can be repaid by the DGS (as

a rule, up to EUR 100 000).

Burden sharing

CCU

CDS

CEPS

CET1

CET1 depletion

CfA

CMDI

CMDI framework

CMU

Common backstop

Covered deposits

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CRD

Creditor hierarchy in insolvency

(hierarchy of claims)

Capital Requirements Directive

The order according to which creditors must be repaid in the

context of the insolvency proceedings (in accordance with

national insolvency laws). While some elements of the creditor

hierarchy have been harmonised at EU level, this order is largely

determined by national law.

Capital Requirements Regulation

Council working party on financial stability and Banking Union

The CWP is a preparatory body created by the Council in January

2016 (previously named Ad-hoc working party) following the

Commission’s proposal to establish a European Deposit

Insurance Scheme (EDIS). Its functions are to address initiatives

and legislative proposals to the objective of strengthening the

banking union and to establish Council’s position on the EDIS.

The European Central Bank and the Single Resolution Board are

invited as observers to its meetings.

Directorate General for Financial Stability, Financial Services and

Capital Markets Union

Deposit guarantee scheme Directive

Deposit Insurance Fund

The hybrid EDIS model is built around the idea of a coexistence of

a deposit insurance fund at central level (DIF) and funds

remaining within the national DGSs.

European Banking Authority

EBA’s reply to the Commission’s Call for Advice on the review

of the CMDI framework.

European Central Bank

European deposit insurance scheme

EDIS would provide liquidity support to a beneficiary DGS, once

the latter has exhausted its funds (following one or multiple

interventions). Liquidity support is an essential element to avoid

that possible shortfalls in DGS funding would have to be financed

by governments. Liquidity support is eventually reimbursed by the

beneficiary DGS (on the basis of recoupments or replenishment

contributions from the banks in its remit).

European Economic Area

Expert Group on Banking, Payments and Insurance

The EGBPI is a consultative entity composed of experts appointed

by EU countries that provides advice and expertise in the

preparation of draft delegated acts in the area of banking,

payments and insurance for the Commission and its services.

Early intervention measures

Early intervention measures are taken by competent authorities to

avert a bank failure when a bank shows signs of distress

(Articles 27-30 BRRD).

Emergency Liquidity Assistance

Deposits that are protected by the DGS, i.e. deposits that are not

CRR

CWP

DG FISMA

DGSD

DIF

EBA

EBA CfA report

ECB

EDIS

EDIS liquidity support

EEA

EGBPI

EIM

ELA

Eligible deposits

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excluded from the repayment guaranteed by the DGS.

ESM

Ex ante

contributions to DGS

European Stability Mechanism

European Union

These are regular financial contributions by the industry to build

up and maintain the fund, to ensure that depositors in all Member

States enjoy a similarly high level of protection.

These are extraordinary financial contributions to the DGS that

are collected, in case the fund does not accommodate the needs,

e.g. after a bank failure to replenish the fund.

Fit for the Future Platform

The

F4F platform

is a high-level expert group that provides input

for the REFIT part of the ‘Better Regulation’ agenda of the

Commission for stepping up the efforts on simplification,

modernisation and burden reduction of EU legislation.

Failing or likely to fail

The first condition for resolution, relating to the imminent or

inevitable inability of the bank to continue operating under

normal conditions. It takes into account the financial situation of

the bank as well as compliance with the requirements for

authorisation.

In case there is no public interest in its resolution, a failing bank

will normally be expected to be wound up under national

insolvency proceedings.

‘Franchise value’ means the net present value of cash flows that

can reasonably be expected to result from the maintenance and

renewal of assets and liabilities or businesses and includes the

impact of any business opportunities, as relevant, including those

stemming from the different resolution actions that are assessed

by the valuer. Franchise value may be higher or lower than the

value arising from the contractual terms and conditions of assets

and liabilities existing at the valuation date.

Financial Stability Board

The term “fully-fledged EDIS” is generally used when referring to

final shape of EDIS as proposed by the Commission in 2015. In

this steady state, EDIS would also progressively cover potential

losses. Potential losses could emerge if the DGS intervention is

not fully recouped from the insolvency estate. In 2018, the

Commission proposed to reach this so-called coinsurance phase

of EDIS, after a reinsurance phase, in which EDIS would only

provide liquidity coverage to national DGS.

The Group of 20 (i.e. G20) is a group formed in 1999 of finance

ministers and central bank governors from 19 of the world's

largest economies, along with the European Union. The G20 has

the mandate to promote global economic growth, international

trade, and regulation of financial markets.

‘Going concern’ is an accounting term for a bank that is assumed

it will meet its financial obligations when they fall due.

‘Gone concern’ is an accounting term for a bank that has already

failed to meet its financial obligations or is expected to do so in

the near future.

Ex post

contributions to DGS

F4F Platform

FOLF

Franchise value

FSB

Fully-fledged EDIS

G20

Going concern

Gone concern

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G-SIIs

Hierarchy of claims (or creditor

hierarchy in insolvency)

Global systemically important institutions

The order according to which creditors must be repaid in the

context of the insolvency proceedings (in accordance with

national insolvency laws). While some elements of the creditor

hierarchy have been harmonised at EU level, this order is largely

determined by national law.

High Level Working Group

The High Level Working Group (HLWG) on EDIS is an inter-

governmental forum mandated by the Eurogroup in 2018 to

discuss the progress on EDIS and which later broadened its scope

of analysis beyond EDIS (the CMDI review, market integration

and the regulatory treatment of sovereign exposures and financial

stability). Representation in this group is at the level of Directors

in Finance ministries. In 2020, the HLWG was mandated to

develop a time-bound and concrete work plan on reaching the

steady stated in the Banking Union.

HLWG

Home and host resolution authorities

These are the resolution authorities in charge of group level or

subsidiary level entities.

Home Member State

Member State hosting the group/parent level of a cross-border

banking group.

The term is generally used to describe the relationship between

Member States from the point of view of the cross-border

coordination and collaboration regarding policies affecting

parent level entities and subsidiaries.

Member State hosting subsidiaries of banking groups established

in another Member State.

The so-called hybrid EDIS model refers to a concept of EDIS

where a new central fund and funds remaining within the national

DGSs coexist. A central fund and possible mandatory lending

among DGSs would provide liquidity support to DGSs to cover

the shortfall on a given intervention. The design of hybrid EDIS is

evolutionary and could in a second phase gradually evolve

towards a loss-sharing phase.

Institutional protection scheme

IPSs are defined in the Capital Requirements Regulation

(Article

113(7))

as a contractual or statutory liability

arrangement, which protects its member institutions and in

particular ensures that they have liquidity and solvency needed to

avoid bankruptcy where necessary. IPSs referred to in this

document are to be understood as IPSs recognised as DGS.

Joint Research Centre

Least cost test

The least cost test assesses whether a DGS may intervene through

other actions than payout of depositors (e.g. in resolution or

through the use of alternative measures). The DGS may only

intervene in resolution if the cost of such intervention does not

exceed the net amount of compensating covered depositors of the

failing member institution. There are no detailed rules on the least

cost test and Member States apply it differently.

A situation where a failing bank for which there is no public

interest in using resolution, can also not be placed in insolvency

because the requirements for the latter are not met.

Home-host

Host Member State

Hybrid EDIS

IPS

JRC

LCT

Limbo situation

VII

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Market-conform measures

million

These are measures carried out by a public body at normal

market conditions, therefore are not considered to constitute State

aid.

Markets in Financial Instruments Directive

Management information systems

Money laundering or terrorist financing

Minimum requirement for own funds and eligible liabilities

MREL is the minimum amount of equity and debt that a bank is

required to meet so as to be able to absorb losses and restore its

capital position, allowing them to continuously perform their

critical functions during and after a crisis. MREL is one of the key

tools in enhancing bank’s resolvability.

National Competent Authority

NCA means a public authority or body officially recognised by

national law, which is empowered by national law to supervise

institutions as part of the supervisory system in operation in the

Member State concerned.

No creditor worse off

A general principle governing resolution, it provides that

creditors cannot receive a worse treatment in resolution than the

treatment they would have received had the bank been wound up

under insolvency proceedings instead of being resolved.

Eligible deposits, in the amount exceeding the coverage level

provided by the DGS, that are not preferred in the creditor

hierarchy in insolvency at EU level pursuant to Article 108(1)

BRRD. These generally refer to the part of the deposits of large

enterprises whose repayment is not guaranteed by the DGS, and

which currently rank below preferred non-covered deposits.

National resolution authority

Official Journal of the EU

Options and national discretions

EU legislation tries to accommodate for national specificities

through options and national discretions. These are provisions

that Member States may choose to implement/apply if they deem it

appropriate to reflect their respective national circumstances.

MiFID II

MIS

ML/TF

MREL

NCA

NCWO

Non-preferred, non-covered deposits

NRA

OND

Open bank bail-in resolution strategy

The application of the bail-in resolution tool, in combination with

the restructuring of the failing bank, in a way that allows that

bank to meet the conditions for its authorisation and to continue

carrying out its activities without requiring its exit from the

market.

Ordinary unsecured claims

Claims that, in the creditor hierarchy in insolvency, are neither

secured, preferred nor subordinated. Also referred to as ‘senior

claims’.

Other Systemically Important Institutions

O-SIIs are institutions that, due to their systemic importance, are

more likely to create risks to financial stability.

O-SII

VIII

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Pari passu

When claims hold the same ranking in the hierarchy of claims

according to the applicable insolvency law.

Repayment by the DGS of the covered deposits with a bank, once

they have been determined unavailable.

The key task of the DGS is to protect depositors against the

consequences of the insolvency of a credit institution. This

protection implies a direct reimbursement of depositors and is

called pay-box function.

Public interest assessment

Resolution authorities perform the public interest assessment to

examine whether the resolution of a particular bank that is failing

or likely to fail would be necessary to maintain financial stability,

to protect covered depositors and/or safeguard public funds by

minimising reliance on public financial support. If the PIA is

negative, no resolution actions would be taken and national

insolvency proceedings would apply.

Capital or liquidity support provided to solvent banks through the

use of public funds that may be exceptionally allowed by the

BRRD without triggering the declaration that the bank is failing

or likely to fail.

Eligible deposits, in the amount exceeding the coverage level

provided by the DGS, and that are preferred in the creditor

hierarchy in insolvency at EU level pursuant to Article 108(1)

BRRD. These generally refer to the part of the deposits of natural

persons and micro, small and medium-sized enterprises whose

repayment is not guaranteed by the DGS.

In integrated banking groups, resources such as liquidity, capital

and internal MREL are pre-positioned by the parent entity on the

balance sheet of subsidiaries, i.e. provided or subscribed by the

parent, to comply with such requirements on an individual level as

required by legislation. Pre-positioning is not required where

waivers are granted by competent or resolution authorities.

Option in Article 11(3) DGSD that allows the use of DGS funds to

prevent the failure of a bank, subject to certain safeguards.

See creditor hierarchy in insolvency

National authorities set up in each Member States, in compliance

with the BRRD and the Single Resolution Board created by the

SRMR in the Banking Union, with the objective to plan, prepare

and execute the orderly resolution of banks in case of failure.

References to the resolution framework in the impact assessment

relate to the harmonised EU rules in the BRRD/SRMR.

Application of resolution tools and powers to a failing bank with

the aim of ensuring the continuity of its critical functions while at

the same time minimising the impact of the failure on the financial

system and the real economy. It can lead to the restructuring of

the failing bank or the transfer of its activity to a third party and

subsequent exit from the market.

Resolution Fund/Single Resolution Fund

Arrangements funded by the industry through contributions paid

before or following the resolution of a bank (so-called ex ante and

Payout

Pay-box function (of the DGS)

PIA

Precautionary measures

Preferred, non-covered deposits

Pre-positioned resources

Preventive measures

Ranking of liabilities

Resolution authorities

Resolution framework

Resolution of a bank

RF/SRF

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ex post contributions) to provide financial support to the

resolution of a bank in case its internal loss absorption capacity is

not sufficient. The SRF is the resolution fund for the banks in the

Banking Union and is financed by all banks in the Banking Union.

For non-Banking Union Members States, the national resolution

fund that has been established in each Member State is financed

by the domestic industry/banks.

Risk reduction package

Safety nets

See banking package

Industry funded safety nets, such as the national resolution funds

outside the Banking Union, the Single Resolution Fund in the

Banking Union and the national DGS funds, created to underpin

the crisis management and deposit insurance framework to avoid

or minimise the usage of taxpayer money.

Possible option to further harmonise the ranking of deposits in the

hierarchy of claims entailing removing the super-preference of

covered depositors and the DGS, preferring all deposits (general

depositor preference) meaning that all deposits as well as the

DGS would rank above ordinary senior unsecured claims and all

deposits rank at the same level amongst themselves (single-tier

approach).

The Single Rulebook is the backbone of the Banking Union and of

the financial sector regulation in the EU in general. It consists of

legal acts that all financial institutions in the EU must comply

with. The Single Rulebook lays down a single set of harmonised

prudential rules (among other things) governing the capital

requirements for banks, ensuring better protection for depositors

and regulating the prevention and management of bank failures.

Micro, small and medium-sized enterprises

Senior non-preferred debt

Senior non-preferred debt is a type of subordinated instrument

issued by banks which ranks junior to ordinary unsecured debt

and senior to classical subordinated debt in the hierarchy of

claims. Created as part of the 2019 Banking Package to assist

banks in raising MREL-subordinated eligible liabilities.

Single point of entry resolution strategy

Resolution strategy whereby resolution tools are applied to one

resolution entity in a resolution group, while other non-resolution

entities upstream their losses to the parent entity and are not

being placed in resolution themselves.

Single resolution fund

See RF/SRF

Single resolution mechanism Regulation

Single supervisory mechanism Regulation

In the creditor hierarchy in insolvency, the higher priority ranking

of the claims of covered deposits, and of the DGS subrogating to

the claims of covered deposits in insolvency following a payout,

than the ranking of preferred, non-covered deposits and non-

preferred, non-covered deposits. The claims of covered deposits

and of DGS must be repaid before the claims of all other deposits.

Treaty on the Functioning of the European Union

Single-tier depositor preference

Single Rulebook

SME

SNP

SPE

SRF

SRMR

SSMR

Super preference of DGS

TFEU

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THB

Tier 2

Temporary high balances

Layer of a bank's capital composed of items such as revaluation

reserves, hybrid instruments and subordinated term debt.

Total Loss-Absorbing Capacity

International standard published by the FSB to ensure that G-SIIs

have sufficient internal capacity to absorb their losses and

contribute to their recapitalisation in the event of resolution in a

way that ensures they can continue performing their critical

functions without endangering public funds or financial stability.

It was implemented in the EU for the EU G-SIIs through the

Banking package.

Total liabilities, including own funds

Financial institutions, which, due to their size, complexity and

interconnectedness, would cause serious harm to the financial

system and to the real economy in case of failure. During the

global financial crisis, the bail-out of several banks was needed to

prevent their disorderly insolvency and contagion risks. As a

consequence, financial reforms to increase the resilience of the

financial system were promoted at the international and EU level,

with the creation of the resolution framework being a key

outcome.

trillion

Resolution action entailing the transfer of the activity and the

critical functions of the failing bank to a private purchaser or to a

bridge institution controlled by the resolution authority, ultimately

leading to its exit from the market. The transfer of the shares of

the failing bank is also possible.

Total risk exposure amount

Calculated in accordance with Article 92(3) CRR.

Current situation in the hierarchy of claims, where covered

deposits are super-preferred and rank above preferred deposits

(natural persons and SMEs above EUR 100 000) which in turn

rank above other (non-preferred) deposits. According to

applicable national laws in some Member States, these non-

preferred deposits rank pari passu (i.e. at the same level) with

ordinary unsecured claims. In other Member States, these non-

preferred deposits rank above ordinary unsecured claims. See

Annex 8, section 2.

Possible option to further harmonise the ranking of deposits in the

hierarchy of claims, where all deposits rank above ordinary

senior unsecured claims (general depositor preference) and in

terms of deposits ranking relative to each other, some deposits

would rank above others (e.g. covered deposits/DGS could rank

above non-covered deposits or covered deposits/DGS and

preferred deposits could rank above non-covered non-preferred

deposits)

TLAC

TLOF

Too big to fail

Transfer resolution strategies

TREA

Three-tier depositor preference

Two-tier depositor preference

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1. I

NTRODUCTION

: P

OLITICAL 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

, 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

, relying on a Single rulebook

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)

. However, the Banking Union is still incomplete

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

G20 (September 2009),

Leaders’ Statement.

European Commission (12 September 2012),

Communication from the Commission to the European

Parliament and Council: A Roadmap towards a Banking Union.

All non-euro area Member States can opt

to participate the Banking Union before joining the euro area.

The most relevant legal acts of the Single rulebook are: the Capital Requirements Regulation (CRR –

Regulation (EU) 575/2013), the Capital Requirements Directive (CRD – Directive 2013/36/EU), the Bank

Recovery and Resolution Directive (BRRD – Directive 2014/59/EU), the Single Resolution Mechanism

Regulation (SRMRM – Regulation (EU) 806/2014) and the Deposit Guarantee Schemes Directive (DGSD

– Directive 2014/49/EU). The winding up Directive (Directive 2001/24/EC) is also relevant to the

framework.

Eurogroup (30 November 2020),

Eurogroup conclusions and statement.

The implementation will take

place over 2022-2024.

Furthermore, there is still no agreement on a credible and robust mechanism for providing liquidity in

resolution in the Banking Union, in line with the standard set by international peers.

kom (2023) 0228 - Ingen titel

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

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

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

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

The Basel Committee on Banking Supervision and the Financial Stability Board (FSB). Financial

Stability Board (2014 updated version),

Key Attributes of effective resolution regimes for financial

institutions.

European Commission communication (November 2015),

Towards the completion of the Banking Union.

National insolvency proceedings are unharmonized and are outside of the CMDI framework. However,

the decision by the resolution authority whether to place a failing bank in resolution or in national

insolvency proceedings is part of the CMDI framework (discretionary assessment by the resolution

authority of the public interest assessment). If the resolution authority decides to place a failing bank in

insolvency, the latter will be treated at national level, where the assessment of initiation of insolvency

proceedings takes place, according to specificities of national insolvency regimes.

kom (2023) 0228 - Ingen titel

alternative measures under national insolvency proceedings) and the specificities of the

case, State aid

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

, 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

, 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

State aid rules are intrinsically interconnected with and complementary to the CMDI framework. These

rules are not subject to this review and this impact assessment. In order to ensure consistency between the

two frameworks, the

Eurogroup invited the Commission in November 2020

to conduct a review of the State

aid framework for banks, and to complete it in parallel with the CMDI framework review, ensuring its

entry into force at the same time with the updated CMDI framework.

Insolvency proceedings across the EU are unharmonised; some allow for certain transfer tools similar to

resolution financed by DGSs, others only allow for piecemeal liquidation proceedings.

Financial Stability Board (October 2011, updated in 2014),

Key attributes for effective resolution

regimes for financial institutions.

The key attributes represent the foundation on which jurisdictions around

the world built their resolution regimes following the global financial crisis.

kom (2023) 0228 - Ingen titel

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

kom (2023) 0228 - Ingen titel

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

, 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)

. 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

As of 1 January 2021, the SRB was directly responsible for 120 banks (significant banks and cross

border less significant banks) in the Banking Union. National resolution authorities in the Banking Union

deal with about 2.200 less significant institutions (SRB,

Annual Report 2021).

In total, there were

approximately 4.600 banks in the European Union in 2020 (European Banking Federation,

Facts and

Figures 2021).

Burden sharing by shareholders and subordinate debt holders was implemented under State aid rules, but

not corresponding to the 8% total liabilities and own funds required by the BRRD/SRMR.

kom (2023) 0228 - Ingen titel

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

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

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)

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.

See Chapter

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on the objectives.

As such, the reform envisaged does not have a direct impact on households and businesses such as SMEs

e.g. on the credit supply and lending behaviour of banks. However, to the extent that the reform would

improve the crisis management for smaller and medium-sized banks with a view to strengthen depositor

protection, depositors such as households and SMEs could indirectly benefit from a more efficient bank

crisis framework that would limit the impact of a bank failure on financial stability and the real economy.

See also Annex 10.

kom (2023) 0228 - Ingen titel

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

125

126

European Parliament (June 2022),

European Parliament 2021 annual report on Banking Union.

See Annex 2.

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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

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

127

Yet, as a mitigating factor for these additional obligations, the BRRD provides for a proportionate

treatment of smaller institutions by allowing for simplified obligations in terms of planning preparation and

reporting of information to relevant authorities.

128

Respondents to the consultation did not specify whether a centralised deposit insurance should take the

form of the 2015 proposal or a hybrid model as under this option.

129

See responses to the

public

and

targeted

consultations.

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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

EFFECTIVENESS

Minimise

Level

recourse to

playing

taxpayer

field, single

money

market

EFFICIENCY

(cost-

effectiveness)

Financial

stability

Depositor

protection

COHERENCE

OVERALL

SCORE

Option 1

Do nothing

Option 2

Slightly improved resolution

funding and commensurate

resolution scope

Option 3

Substantially

improved

resolution

funding

and

commensurate

resolution

scope

Option 4

Ambitious

CMDI

including EDIS

reform

+++

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

kom (2023) 0228 - Ingen titel

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.

130

Using the DGS fund for measures other than payout may result in lower disbursement needs than when

paying out covered deposits in insolvency. See sections 7.1.4.4 and 7.2.2.6 in the evaluation (Annex 5) and

ECB (October 2022),

Protecting depositors and saving money - why DGS in the EU should be able to

support transfers of assets and liabilities when a bank fails.

kom (2023) 0228 - Ingen titel

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.

Box 4: Implementing the EBA advice

The analysed policy options closely follow the opinions provided by the EBA for the

CMDI review through two main channels.

First, the options retain 16 out of 19 recommendations from a set of four opinions

dedicated to the review of the DGSD functioning (Table 10, Annex 6, section 2). The

only exceptions are related to definitions of certain concepts discarded based on

technical and legal considerations, or to recommendations which received no support

131

See Chapter 2, section 2.3.1 and Annex 6.

Fintech services refer to technology and innovation that aims to compete with traditional financial

methods in the delivery of financial services (e.g. payments, investment).

132

kom (2023) 0228 - Ingen titel

from Member States. This is the case for the following elements:

the recommendation to clarify the concept of “normal banking transaction” in the

definition of deposit in light of recent case law

133

that clarifies whether certain

funds held on an account fall within the definition of a deposit will be subject to a

case-by-case assessment;

the recommendation to assess whether there was a need to revise the definition of

low-risk assets related to investments of the DGS available financial means led to

the conclusion that there was no need to change this definition based on the

feedback received from Member States where a majority did not see merit in

changing the current definition;

the recommendation on the possibility to use failed institutions’ assets for a DGS

payout was discarded based on the low likelihood that a failed institution would

have a significant amount of liquid assets to pay depositors in the DGS’ stead.

Second, the EBA report responding to the Commission’s call for advice regarding

funding in resolution and insolvency was fully taken into account. The policy options of

the impact assessment mirror the different scenarios of changes in the creditor hierarchy

analysed by the EBA, from the unharmonised three-tier depositor preference (status quo)

to the harmonised single-tier depositor preference (preferred option). The EBA provides

evidence that equally preferring all deposits to other ordinary unsecured claims could

significantly increase the number of institutions that could be more efficiently managed

in case of failure, by (i) reducing the overall cost (as the value of the bank is better

preserved when it can be sold in resolution, as opposed to its assets sold in pieces in

insolvency), (ii) accessing resolution financing arrangements (funded by the industry as

opposed to taxpayers) and (iii) avoiding a bail-in of deposits (and deriving financial

stability concerns and possible contagion generated by the unavailability of deposits in a

liquidation). The impact assessment leverages on this pivotal conclusion to justify its

policy choices in Annex 7 and reproduces the EBA’s quantitative material in the

numerical tables reported in this Annex.

REFERRED 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

133

The EU CJEU has clarified the meaning of the concept ‘normal banking transactions’ in the judgment

of 22 March 2018 (Joined cases C 688/15 and C 109/16 Anisimovienė and Others v. Snoras).

134

However, a different mechanism (hybrid) than the fully fledged EDIS put forward in the 2015

Commission proposal.

kom (2023) 0228 - Ingen titel

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

135

FOLF may not be triggered if private solutions are available to avert the bank’s failure.

kom (2023) 0228 - Ingen titel

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

136

Article 10(9) DGSD Recourse to alternative funding sources would entail borrowing from the market,

from other DGSs or from the State’s public budget.

137

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

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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.

Box 5: What this reform could mean for depositor protection and DGSs

Proposed changes under this reform



Facilitated use of DGS funds in resolution to support the transfer of deposits, including non-

covered deposits, from smaller/medium-sized banks funded by deposits that would have a

positive PIA in case of failure, to other viable acquirers;

Possibility to shield more depositors from losses, if conditions are met, at a lower cost for the

DGS compared to a payout of covered deposits under insolvency;

Harmonising the depositor preference in the hierarchy of claims by achieving a single-tier

depositor preference, reducing unlevel playing field and NCWO issues in cross-border cases;

Allowing a more cost-efficient use of DGS funds:

Changing the creditor hierarchy would enable unlocking DGS funds for resolution and

alternative measures, under the least cost test, with increased cost efficiency compared to

the cost of payout events. However, this would also potentially increase the use of DGS

funds for transfer strategies with a call on the industry to replenish them;

Facilitating transfer strategies and better preserving the DGS financial means and

protecting also non-covered deposits, as they would generally be more cost-effective than

the payout of covered deposits. Transfer strategies in resolution could be more cash

efficient and preserve the DGS funding capacity (e.g. by providing guarantees), or strongly

limit the potential final loss but be more cash consuming (e.g. by providing loans) (see

Annex 10);

The use of DGS funds in measures alternative to payout of covered deposits ensures intact

client relationships and continued access of depositors to their accounts without any

interruption of services, an important aspect in digitalised economies;

A clearer and more consistent approach to preventive measures would also be cost-

effective for depositors by avoiding the bank’s deterioration, depositor service interruption

and costly payout events.

Least cost test:

Removing legal uncertainty and inconsistency regarding the least cost test and the DGS

intervention in preventive measures, resolution and alternative measures in insolvency

(clarification and harmonisation of applicable conditions under Articles 11(3), 11(6)

DGSD and Article 109 BRRD);

The inclusion of indirect costs in the least cost test calculation may be envisaged, but this

alone would not replace the effect that the changes in the hierarchy of claims have on its

outcome.



liquidation already report data to resolution authorities who prepare resolution plans albeit on a less

frequent basis (under simplified obligations).

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What stays the same



The DGS coverage level (eligible deposits up to, generally, 100,000 EUR) and the DGS target

level (in principle, 0.8% of covered deposits);



Covered deposits and of the remaining part of eligible deposits of natural persons and SMEs

(preferred deposits) would continue to rank senior to ordinary unsecured creditors;

The protection of covered deposits, which continues to be ensured by:

the mandatory exclusion of covered deposits from bail-in as per Article 44(2) BRRD

The repayment of the covered amount guaranteed by the DGS, in case of unavailability

the possibility for the DGS to contribute to interventions other than the payout of covered

deposits, such as contribution to resolution or to preventive measures and alternative

measures in insolvency;

The counterfactual in the least cost test (referring to the losses that covered deposits would

have incurred in insolvency).



Rationale for shielding also (non-covered) depositors from losses



Allowing more credible transfer strategies by facilitating the inclusion in the transfer

perimeter of entire deposit contracts and not only the covered part. This avoids compromising

the customer relationship and the franchise value, which would otherwise increase the risk of

deposit runs and potentially impair the appetite of the acquirer for the transfer;

Maintaining the integrity of deposits, which are considered by most national authorities

instrumental to bank intermediation in the economy (i.e. channelling savings into investments

and lending), one of the main pillars of confidence in the banking system and an important

element to financial stability and the functioning of the payment system;

Deposits fulfil a different role in the economy than investor claims. Depositors use banks,

primarily, as a secure place for placing their savings, for meeting future needs, while investors

take a (remunerated) claim in the bank after having analysed related risks and rewards;

Alignment with past experiences of handling banks’ failures showing a high interest in

protecting deposits, where State aid was granted,

inter alia,

with the aim of protecting

depositors and where the use of those public funds did not require the burden sharing of any

depositor.

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.



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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.

138

See also section 6.1.2.6 on the main considerations of the European Parliament related to the CMDI

reform.

139

See section 6.3 and Annex 8 on the ‘Common elements across the packages of options’.

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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.

140

Regulation (EU) 2021/1119 of the European Parliament and of the Council of 30 June 2021 establishing

the framework for achieving climate neutrality and amending Regulations (EC) No 401/2009 and (EU)

2018/1999 (‘European Climate Law’)

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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.

OW 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

Data

already

collected?

Yes

Actor(s)

responsible

for data

collection

EBA/NRAs/

SRB,

Commission

EBA/NRAs/

SRB

Commission

EBA,

Commission

EBA

Objectives

Indicator

Source of information

Information from the

NRAs/SRB,

Official Journal

Information from the

NRAs/SRB

Official Journal

Information from the

DGSs,

Official Journal

Information from

NCAs/SSM

Number of banks undergoing resolution

Further enhance

legal certainty

and strengthen

an even playing

field as regards

the application

of the tools

available in bank

resolution and

insolvency.

Number of different resolution tools and powers

applied (e.g. transfer tools, bail-in)

Number of banks benefitting from precautionary

aid measures, which subsequently are determined

to be FOLF

Number of banks benefitting from DGS

preventive measures, which subsequently are

determined to be FOLF

Number of banks (for which EIM triggers have

been met) addressed through an EIM measure

Yes

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Number of positive PIA assessments by the

NRAs/SRB for banks determined to be FOLF and

type of elements included in the

PIA assessments

Number of winding up procedures

Average period between the issuance of a

negative PIA assessment and the initiation of the

orderly winding up proceedings for failing banks

that cannot be resolved

Complaints about competitive disadvantages due

to different insolvency rankings of ordinary

unsecured claims and other deposits

Ad-hoc statistical analysis e.g. correlation

between CDS banking sector and CDS of

sovereign, correlation between bank share price

and sovereign spread (*)

Number of banks (of small/medium/large size)

which are determined to be FOLF accessing

resolution funding and amount of resolution funding

provided.

Percentage of banks (of small/medium/large size)

which are determined to be FOLF accessing

resolution funding

Number of banks undergoing resolution

accessing DGS funding in resolution and amount

of the DGS funds provided in resolution in

relation to the two possibilities: (a) bridging the

gap to the 8% minimum bail in requirement

otherwise required, for transfer strategies, or

(b) other uses in resolution than bridging the gap

to the 8% minimum bail in requirement otherwise

required, for transfer strategies.

Number of banks accessing DGS funding for

alternative measures and amount of DGS funds

provided for alternative measures.

Number of banks accessing DGS funding for

preventive measures and amount of DGS funds

provided for preventive measures.

Number of national DGSs without any alternative

funding arrangements in place

Final amount of losses incurred by DGSs for any

type of intervention

Information from the

NRAs/SRB

Information from the

NCAs/DGSs

Information from the

NCAs/NRAs/DGSs

EBA

Yes

EBA

Stakeholder feedback

Commission

Market data

Yes

EBA

Information from the

NRAs/SRB;

Official Journal

Yes

EBA,

Commission

Facilitate access

to safety nets in

case of bank

failure and

improve the

clarity and

consistency of

funding rules.

Information from the

DGSs/SRB,

Official Journal

Yes

EBA/DGS/

SRB,

Commission

Information from the

DGSs,

Official Journal

Information from the

DGSs,

Official Journal

Yes

EBA,

Commission

EBA,

Commission

Yes

Further align the

Stakeholder feedback

Commission

coverage level of

depositors and

Information from the

EBA

upgrade the

DGSs

capacity of

Number of cases where third country branches

national DGS’s

Information from the

were granted a derogation from the obligation to

EBA

to withstand

responsible authority

participate in the DGS.

local shocks.

(*) 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

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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.

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NNEX

1: P

ROCEDURAL INFORMATION

EAD

DG, D

ECIDE

LANNING

OMMISSION 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

RGANISATION 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.

141

Commission Work Programme 2021: A Union of vitality in a world of fragility, 19 October 2020,

COM(2020)690 final.

142

Eurogroup (16 June 2022),

Eurogroup statement on the future of the Banking Union

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ONSULTATION 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:

Recommendations of the RSB

Elements to improve (section (C) of the

Opinion)

(1) The report needs to better identify and

explain the substantive problem and

shortcomings in the current framework it

seeks to address and substantiate it with

robust evidence. In doing this, it should

draw on the conclusions of the evaluation

that the EU resolution framework is

sparsely used. It should examine exactly

why this is a problem and what the drivers

behind it are by clearly setting out the

disincentives for Member States (and

banks) to practical bank resolution using

the EU framework. It should explain why

the current arrangements and incentives

have failed and why Member States have

shown a strong preference for resolution

outside of the EU framework. It should

demonstrate why this poses a risk to the

wider financial stability of the EU. It

should show why the current arrangements

would not be fit for purpose in a large scale

financial crisis scenario. Finally, it should

better explain the international experience

in handling bank failures and the lessons

that can be drawn from these.

How the comments have been addressed



Clarifications of the objective, design

and scope of the crisis management and

deposit insurance framework and the

merits of resolution compared to

national insolvency proceedings

(Chapter 1 and Annex 4 for additional

details).

Summary of the problems identified

during the implementation of the

framework and the reasons why this

reform is necessary, in particular why

the framework should also be

applicable to small and mid-sized

banks; additional evidence showing

that the failure of smaller banks can

also impact financial stability including

a stylised example to illustrate these

problems (Chapter 2, Annex 4, Box 6)

Details on the nature and magnitude of

the risk of maintaining the framework

as it stands, considering the problems

identified and their impacts on financial

stability, depositor protection and

public finances (Chapter 5, section 5.3)

Update of relevant figures on the

implementation of the framework to

take into account a recent resolution

case in Poland (Chapter 2 and Annexes

5 and 9)

Details on the how recent cases of

failure managed under the CMDI

framework relate to the identified

problems (Boxes 8, 10 and 11, Annex

Explanations on how the principle of

subsidiarity is addressed in the reform



(2) While the resolution framework is

designed to cover all banks in the EU, in



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practice its use has been limited. The report

should recall and better explain that all

banks are covered by the existing

framework and demonstrate, with evidence,

the need to facilitate the practical use of the

EU resolution framework for smaller and

mid-sized banks. It should demonstrate

how this is consistent with the principle of

subsidiarity. This should include evidence

to demonstrate the clear cross-border

nature of the problem including by

providing evidence on the composition of

the banking sector in different Member

States and the differing scale and

geographical spread of the potential

recipients. It should provide evidence of

the risk of EU-wide contagion in the

internal market and for public finances if

the current arrangements persist. Finally, it

should better set out the division of roles

between the EU state aid framework (and

its upcoming revision) and the resolution

framework and how coherence will be

ensured between the two.

(3) The report should better explain the

links between the EBA advice and the

options set out in the report. It should

clarify the envisaged bridging facility, its

scope and limitations, and its envisaged

impacts. It should explain that EDIS under

the most comprehensive option 4 is

different from the 2015 EDIS proposal. It

should better articulate how the analytical

and policy coherence between option 3

(which does not include EDIS and for

which a further legislative proposal is

envisaged) and the pending 2015 EDIS

proposal will be ensured. In view of this

specific context and the results of the

presented analysis the report should reflect

whether analytically it is not more useful to

leave the choice of the preferred option

open.

(4) The report should be revised to make it

self-standing and accessible to the non

specialist reader. While technical language

is necessary in certain parts for experts

practitioners, and in particular in annexes,

it is important that the main narrative

remains clear for political decision makers.



and evidence on risk of contagion and

systemic nature of small banks

(Chapter 3, section 3.2, Annex 4, Box

Details on the interactions between the

CMDI and the State aid rules under the

current framework and how

consistency will be achieved with the

revision of the CMDI framework

(Chapter 5, section 5.2 and Annex 4)

Some amendments listed to address

recommendation (1) are also relevant for

recommendation (2).



Details on how the advice provided by

EBA has been taken into account in the

design of the policy options (Chapter 6,

section 6.3, Box 4)

Details on the functioning of the DGS

bridge financing, including on the

scope and safeguards and a stylised

example with a visual presentation of

the CMDI reform on this point

(Chapter 6, section 6.1.1.2, Box 2)

Clarification that EDIS envisaged

under option 4 in the packages of

policy options is not the same

mechanism as envisaged as the

Commission 2015 proposal (Chapter 6,

section 6.1.3 - Option 4, section 6.1.2.6

– Option 3 and footnote in Chapter 7)

Executive summaries of EBA and JRC

reports used in, and annexed to, this

impact assessment respectively

(Annexes 11 and 12)

A general review of the core impact

assessment and the glossary to clarify

technical terms and contribute to make

the report more self-standing for a non-

expert audience.

Additions to, and review of, the



kom (2023) 0228 - Ingen titel

(5) The report should better integrate the



views of all stakeholders in the main report,

by better distinguishing between the views

of different groups on all key aspects.

glossary

Additional information on stakeholder

views with a distinction between small

and large banks (Chapter 6, sections

6.1.1.6 Assessment of Option 2 –

Overall assessment and 6.1.2.6

Assessment of Option 3 – Overall

assessment)

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:

Recommendations of the RSB

Elements to improve (section (C) of the

Opinion)

(1) The report should address the ‘One In:

One Out’ requirements. If quantitative

estimates cannot be produced, or if these

are negligible, or the proposal is considered

to have no ‘One In: One Out’ implications,

this should be explained.

(2) While the report presents general views

of large and small banks on the policy

options, Annex 2 still does not provide a

general overview of differentiated

stakeholder views. Annex 2 should

consider responses by type of stakeholder.

VIDENCE

SOURCES AND QUALITY

How the comments have been addressed



Additional information on the ‘One In

One Out’ clarifying the neutral effect

of the initiative on administrative costs

added in Annex 3 and referenced also

in Chapter 7 when describing the

preferred option.

Additional information on stakeholder

views with a distinction between small

and large banks included in Annex 2,

in line with the description of

stakeholder views in Chapter 6.



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

;

143

144

Eurogroup (June 2022),

Eurogroup statement on the future of the Banking Union of 16 June 2022.

European Commission (April 2019),

Report from the Commission to the European Parliament and the

Council on the application and review of Directive 2014/59/EU (BRRD) and Regulation 806/2014

(SRMR).

145

See Annex 9.

146

European Parliament (June 2022),

European Parliament 2021 annual report on Banking Union.

kom (2023) 0228 - Ingen titel



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):

a 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

a 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

;

147

148

Public consultation

on the review of the bank crisis management & deposit insurance framework.

Targeted consultation

on the review of the bank crisis management & deposit insurance framework.

149

High-level conference –

Strengthening the EU’s bank crisis management and deposit insurance

framework: for a more resilient and efficient banking union.

150

European Commission (19 April 2021)

Call for advice to the EBA regarding funding in resolution and

insolvency as part of the review of the crisis management and deposit insurance framework.

151

EBA opinions of

8 August 2019, 30 October 2019, 23 January 2020

and

28 December 2020

issued

under Article 19(6) DGSD in the context of the DGSD review. See also Annex 6.

152

EBA (27 May 2021),

Report on the application of early intervention measures in the European Union

in accordance with Articles 27-29 of the BRRD,

EBA/REP/2021/12.

153

ECB (October 2022),

Protecting depositors and saving money - why DGS in the EU should be able to

support transfers of assets and liabilities when a bank fails.

154

European Commission (28 November 2019) under the European Parliament’s Pilot Project “Creating a

true Banking Union”

Study on the Options and national discretions under the DGSD and their treatment in

the context of a European Deposit Insurance Scheme.

155

European Commission (28 November 2019) under the European Parliament’s Pilot Project “Creating a

true Banking Union”

Study on the differences between bank insolvency laws and on their potential

harmonisation.

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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



For example, workshop at the Banca d’Italia on

The crisis management framework for banks in the EU -

How can we deal with the crisis of small and medium-sized banks.

157

European Commission, ECB and SRB (November 2020),

Joint monitoring report on risk reduction

indicators.

158

European Commission, ECB and SRB (May 2021),

Joint monitoring report on risk reduction

indicators.

159

European Commission, ECB and SRB (November 2021),

Joint monitoring report on risk reduction

indicators.

160

The outcome of these discussions is mostly in public domain on the

Council webpage.

161

Eurogroup (30 November 2020),

Eurogroup conclusions.

162

F4F Platform Opinion (10 December 2021),

Completing the Banking Union.

163

Financial Stability Board (1 April 2021),

Too big to fail report.

164

European Court of Auditors (January 2021),

Special report: Resolution planning in the Single

Resolution Mechanism.

165

European Court of Auditors (October 2020), Special Report 21/2020,

Control of State aid to financial

institutions in the EU: in need of a fitness check.

156

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NNEX

2: S

TAKEHOLDER CONSULTATION

NTRODUCTION

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.

ONSULTATION 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:

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.

EEDBACK 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

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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.

UBLIC 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.

166

167

See consultation pages of the

targeted consultation

and the

public consultation.

The questions of the public consultation were a subset of the questions of the targeted consultation.

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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.

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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

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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

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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

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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.

ARGETED CONSULTATIONS OF

EMBER

TATES

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

168

See

CEPS study.

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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

169

See

VVA study.

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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.

170

European Council (23 November 2020), German Council

Presidency Progress Report

on the

Strengthening of the Banking Union.

171

European Council (2 June 2021), Portuguese Council

Presidency Progress Report

on strengthening the

Banking Union.

172

See

Letter by the HLWG Chair to the President of the Eurogroup

(December 2019).

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IGH

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.

See the European Commission’s

conference webpage

for details on the programme, the speakers and

the recoding of the event.

173

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The Commission services invited stakeholders to provide their views through the two

open consultations, which would be duly considered in the assessment and proposal.

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.

F4F P

LATFORM 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.

174

See Annex 1.

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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.

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NNEX

3: W

HO IS AFFECTED AND HOW

RACTICAL 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

175

As explained in Chapter 2.

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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.

176

Through the use of DGS funds to bridge the gap towards the minimum access condition to the RF/SRF,

as explained in Chapter 6.

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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.

According to the Commission’s Better Regulation Toolbox (#58), administrative costs are the costs

incurred by enterprises, the voluntary sector, public authorities, and citizens in meeting administrative

obligations towards public authorities or private parties. Administrative obligations in a broad sense

include labelling, reporting registration, monitoring, and assessment needed to provide the information. In

some cases, the information must be transferred to public authorities or private parties. In others, it only

must be available for inspection or supply on request.

178

The Commission has committed to the ‘one in, one out’ (OIOO) approach (see Political Guidelines of

President von der Leyen, ‘better regulation’ Communication of 29 April 2021, COM(2021) 219). This

means offsetting new burdens resulting from the Commission’s proposals by reducing existing burdens in

the same policy area. The ‘better regulation’ Communication COM(2021) 219, sets out the main principles

of the approach (identification through cost estimation methods and reporting for the purpose of OIOO).

OIOO only applies to cost implications originating from Commission proposals and covers the impact of

new regulatory requirements (not ‘business as usual’ costs). Costs imposed by other parties – co-legislators

or by Member States and local, regional authorities – are not included.

177

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Table 2: Overview table depicting winners and losers

Summary of winners and losers

Taxpayers

Depositors

Banks

Creditors

Resolution

authorities

Problem 1:

Insufficient legal certainty and predictability in the management of bank failures

Problem 2:

Ineffective funding options and divergent access conditions for the financing of resolution and insolvency

Problem 3:

Uneven and inconsistent depositor protection and lack of robustness in DGS funding

Baseline:

Do nothing

Option 3:

Substantially improved resolution funding

+++

+/-

179

+++

and commensurate resolution scope

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

Effectiveness

Financial stability

Minimise recourse

to taxpayer money,

weaken bank-

sovereign loop

Level playing field,

single market

Depositor

protection

Proportionality

Efficiency

Coherence

Problem 1:

Insufficient legal certainty and predictability in the management of bank failures

Problem 2:

Ineffective funding options and divergent access conditions for the financing of resolution and insolvency

Problem 3:

Uneven and inconsistent depositor protection and lack of robustness in DGS funding

Baseline: Do nothing

Option 3:

Substantially improved

resolution funding and

+++

commensurate resolution scope

179

Bank’s creditors would benefit from a higher valuation in resolution than under piecemeal liquidation and preservation of the franchise value of the bank, however, some of them

may be bailed-in if the access to the RF/SRF is required to resolve the bank.

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UMMARY OF COSTS AND BENEFITS

Table 4: Overview of the benefits

I. Overview of Benefits (total for all provisions) – Retained Options

Amount

Direct benefits

Description

Enhanced legal certainty,

harmonisation and simplification

of certain rules leading to

convergence and level playing

field.

Comments

No available amount

ex ante.

Strengthening the single rulebook and harmonising

crisis management rules will unify the regulatory environment and increase the

level playing field, possibly fostering more integration in the single market,

which could be monitored in the future.

By harmonising the application of the PIA, the depositor preference in the

hierarchy of claims, the least cost test to access DGS funding for various

interventions, the retained option would enhance legal clarity and achieve a

significant simplification of rules.

Resolution authorities would be the main

recipients of these benefits, especially when

working on cross-border banking groups, mainly

due to increased standardisation, simplification

and streamlining of rules. Additional legal

clarity would reduce the risk of legal challenge

for authorities related to the planning,

formulation of requirements to banks and

execution of the preferred strategy.

Market participants would also benefit from

standardisation, as they would be in a better

position to assess risks related to banks.

Depositors would also be the recipients of these

benefits, as the harmonisation of depositor

preference in the hierarchy of claims would

ensure their fair their treatment across Member

States.

Taxpayers would be the main recipients of this

benefit. A more efficient use of DGS funds

would reduce the risk of DGS liquidity shortfall

and the need of public intervention as a backstop

to the DGS.

Reduced recourse to taxpayer

money.

No amount available

ex ante.

Taxpayer money would be more protected when

handling failing banks by using resolution or alternative measures more

consistently, mainly because shareholders, creditors and, if needed, the resolution

fund/ DGS would bear losses and support executing the resolution strategy.

Estimating the amount of taxpayer funds savings that would be enabled by these

reform would be bank-specific. As an indication based on the past, when

considering the examples of failing banks between 2015 and 2022, taxpayer

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exposures to such contingent liabilities reached EUR 58.2 bn (out of which EUR

28.1 bn were used for liquidity support). However, future uses of taxpayer money

cannot be gauged on past cases.

Strengthened depositor

confidence through continued

access to accounts, greater

protection of eligible deposits

(also non-covered) and avoidance

of bank runs.

No amount available

ex ante.

Alternative use of DGS for paying out covered

deposits under insolvency would limit the disruption caused by blocked deposit

accounts. It would be confidence enhancing and less prone to contagion/bank

run. Moreover, non-covered deposits (above EUR 100 000) in the EU (amounts

not reported to EBA) would also be more protected from bail-in under transfer

strategies as per the retained option, while they are not protected under a payout

scenario (only covered deposits are protected in that case). This prospect would

potentially deter depositors from running on the bank.

In a payout event, where depositors must be reimbursed within seven days,

interrupted access to accounts, social benefits and credit facilities for even a short

period in prevalently cashless societies, using or operating with credit and debit

cards and electronic systems, could impact the overall economy. The failure of

smaller and medium-sized banks can also create substitutability issues because of

challenges for a high number of depositors and banks to simultaneously open

new accounts to receive their reimbursement.

No amount available

ex ante.

The cost of a DGS intervention measure either in

resolution or under alternative measures in insolvency would be cheaper than the

cost of paying out covered depositors under a piecemeal liquidation. A payout of

covered depositors is usually cash consuming as the DGS would be required to

reimburse the amount of covered deposits to all eligible covered depositors

before recovering (part of) this amount during the insolvency proceedings.

Moreover, the least cost test ensures that the DGS contributions under resolution

or alternative measures in insolvency are always lower than those in a payout

event. Therefore, facilitating other measures than payout would better preserve

the financial means of the DGS, reducing the amounts of losses that may arise

through the DGS intervention.

However, it is very challenging to provide an amount corresponding to the cost

reduction for the DGS as this would be bank-specific.

Covered and non-covered eligible depositors are

the main recipients of these benefits because

their deposits would be less likely to be bailed-

in. More generally, depositor confidence in the

banking sector would be strengthened by

limiting DGS payout events and facilitating the

use of DGS funds for measures preserving their

continued access to their accounts (e.g.

resolution or alternative measures in

insolvency).

More efficient use of DGS funds

in managing banks in crises.

Banks contributing to the DGS funds and DGS

authorities are the main recipients of this

benefit.

By preserving DGS available financial means,

banks would be called on to contribute less to

replenish the spent funds. Additionally, DGS

authorities would benefit from a more efficient

usage of DGS available financial means.

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More credible and proportionate

access to RF/SRF for smaller and

medium-sized banks.

No amount available

ex ante.

A more credible and proportionate access to

RF/SRF for smaller and medium-sized banks would lead to a wider application of

resolution tools (transfer of deposit book), preserving more value, in particular

when compared to a piecemeal liquidation or a procedure under non harmonised

national insolvency rules. The use of the industry-funded safety net would

replace in many cases the bail-in of non-covered depositors.

However, estimating the amount of the RF/SRF that would be required is not

possible

ex ante

because it would depend on a case by case analysis and the

specific circumstances of each bank at the moment of failure (e.g. level of losses

at the point of failure, the financial fundamentals of the bank, the composition of

its liabilities, all of which feed into the results of the valuation exercise).

Non-covered depositors would be the main

recipients of this benefit. They would not see

their deposits wiped out in case their bank

would be failing and resolved under a transfer

strategy. Rather, the DGS and the RF/SRF

which are industry-funded safety nets would

step in to facilitate the resolution of that

respective bank.

Franchise value of a failing bank

preserved when facilitating

transfer strategies.

No amount available

ex ante.

The transfer of the (whole or partial) business

Stakeholders in a failing bank, the other banks

would preserve the franchise value to a greater extent than under a piecemeal

contributing to safety nets, as well as taxpayers

liquidation approach. It would avoid the destruction of the business brand,

are the main recipients of this benefit.

preserving the commercial relationships with the clients and consequently better

maintaining the profitability of, and the return on the assets. Transfer strategies

could be applied in resolution. Where resolution is discarded (negative PIA),

alternative measures in insolvency maintain an incentive to maximise the

franchise value, thereby minimising the cost for the DGS. However, an amount

reflecting the preservation of value cannot be estimated. Doing so would be fully

case-dependant and specific to the circumstances of each bank at the moment of

failure.

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Indirect benefits

Better aligned incentives to apply

resolution tools and benefit from

funding solutions to execute the

strategy.

No amount available. Improving the incentives to apply an improved and

Taxpayers, depositors, resolution authorities,

more standardised framework would lead to less circumvention in application banks and markets would all be recipients of

and more level playing field at EU level.

this benefit.

However, this cannot be quantified, as it would be the sum of the benefits

stemming from the protection of taxpayers and depositors, more efficient use

of DGS funds and more legal certainty in using tools for the banks, resolution

authorities and markets.

No amount available. Fixing the tools and the funding to deal with

smaller/medium-sized banks which are predominantly deposit taking would

preserve such traditional business models across the EU, on the condition

that they remain viable.

n/a

The society at large is the recipient of this

benefit.

Preservation of Europe’s diversity in

banking business models.

Administrative cost savings related to the ‘one in, one out’ approach*

n/a

(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.

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Table 5: Overview of costs

II. Overview of costs – Retained options

Citizens/Consumers /Businesses

One-off

n/a

Banks

One-off

More banks coming

into the scope of

resolution would

require investing in

projects enhancing

their resolvability (e.g.

IT systems, timely

data reporting, legal

structure, review

contracts in view of

implementing

resolution stays,

valuation capabilities,

liquidity monitoring,

etc.). As resolution

authorities continue to

retain discretion in

their decision to place

banks in resolution vs

insolvency, the

number of banks that

Administrations

Recurrent

One-off

Applying resolution

tools presumably

more often, due to

the expansion of the

resolution scope,

depending on the

occurrence of failure

events.

This cost cannot be

estimated upfront, as

resolution authorities

continue to retain

discretion in their

decision to apply

resolution vs

insolvency.

Recurrent

Preparing more

resolution plans,

conducting more

resolvability

assessments and

setting MREL

requirements for more

banks as part of

yearly resolution

planning cycles. The

number of banks

which would enter the

resolution scope and

therefore this cost

cannot be estimated

upfront, as resolution

authorities continue to

retain discretion in

their decision to apply

resolution vs

insolvency.

Expanding the

scope of

resolution

through clarified

PIA

Direct adjustment costs

Raise MREL eligible

instruments in case

of shortfalls against

the set targets. This

cost cannot be

estimated upfront

because it depends

on the features of the

bank

180

, its potential

bank-specific MREL

target, the

outstanding stock of

eligible instruments

already held and

market conditions.

180

E.g. rating, creditworthiness, financial fundamentals (such as quality of assets, capitalisation, etc.).

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II. Overview of costs – Retained options

Citizens/Consumers /Businesses

One-off

Recurrent

One-off

would enter the scope

of resolution cannot

be estimated.

Moreover, the

additional costs that

each bank may incur

to become more

resolvable depends on

the specific situation

of each bank (efficacy

of management

information systems,

valuation capabilities,

etc.)

Direct administrative

costs

Direct regulatory fees

and charges

Direct enforcement

costs

Indirect costs

n/a

Additional costs

for banks may be

passed on to

clients. However,

n/a

Banks

Recurrent

Administrations

One-off

Recurrent

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II. Overview of costs – Retained options

Citizens/Consumers /Businesses

One-off

Recurrent

such costs should

be limited.

Facilitating the

use of funds in

resolution and

alternative

insolvency

measures

Facilitating the use of

DGS funds may

increase the costs for

the banking sector

due to additional

contributions to

replenish the DGS

upon depletion. No

quantification

available, as an

estimate would

strongly depend on

the amount of funds

the DGS would use

which reflects the

losses in case of a

failure. However,

this cost would be

compensated through

more efficient use of

DGS in resolution

compared to payout

in insolvency.

More complex

processes and

additional tasks for

resolution authorities

when DGS can

contribute towards

the minimum 8%

TLOF bail-in

condition to access

the RF/SRF.

Banks

One-off

Recurrent

Administrations

One-off

Recurrent

Direct adjustment costs

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II. Overview of costs – Retained options

Citizens/Consumers /Businesses

One-off

Direct administrative

costs

Direct regulatory fees

and charges

Direct enforcement

costs

Indirect costs

n/a

Banks

One-off

n/a

Costs by

small/medium-sized

banks which have

already raised MREL

instruments and can

access RF/SRF

without DGS

contribution.

n/a

Administrations

Recurrent

n/a

Recurrent

One-off

n/a

Recurrent

Costs related to the ‘one in, one out’ approach

Direct adjustment costs n/a

Indirect adjustment

costs

Administrative costs

(for offsetting)

n/a

(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,

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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.

ELEVANT SUSTAINABLE DEVELOPMENT GOALS

(SDG

)

III. Overview of relevant Sustainable Development Goals – Retained option

Expected progress towards the Goal

Relevant SDG

Comments

SDG no. 8 – decent work and

economic growth, nr. 13 – climate

action, no. 9 – industry, innovation

and infrastructure

181

Increased financial stability, a more integrated single market and level playing field will

lead to increased resilience for the EU banking sector, which in turn, is more likely to

finance the economy creating growth and contribute to the sectors’ green and digital

transition (‘twin transition’). These contributions to economic growth and the twin

transition cannot be quantified in relation to this initiative.

181

United Nations’

Sustainable Development Goals

(2015).

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NNEX

4: ‘Z

OOM

’

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.

182

183

Article 11(3) DGSD.

Resolution is considered in the public interest when resolution is necessary for the achievement of and

proportionate to one or more resolution objectives and normal insolvency proceedings would not achieve

the resolution objectives to the same extent (Article 32 BRRD).

184

In the following, reference to the BRRD should be understood as including also corresponding

provisions in the SRMR.

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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

185

The Commission has direct enforcement powers in relation to EU 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 to banks under Article 107(3)(b) TFEU in several

Commission Communications, including the 2013 Banking Communication.

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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.

186

Eurogroup (November 2020),

Statement of the Eurogroup in inclusive format on the ESM reform and

the early introduction of the backstop to the Single Resolution Fund.

The intention of the Eurogroup is to

ensure that the outcome of the State aid rules review is aligned with the outcome of the negotiations of the

CMDI review by co-legislators.

187

In March 2022, the Commission has launched a

Call for Evidence

together with a

public

and

targeted

consultation to seek stakeholder feedback on the evaluation of State aid rules for banks in difficulty. The

input collected and a study will feed into the evaluation that the Commission aims to publish.

188

Insolvency proceedings across the EU are unharmonised; some allow for certain transfer tools similar to

resolution financed by DGSs, others only allow for piece-meal liquidation proceedings.

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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.

189

See Chapter

Error! Reference source not found.

on the objectives.

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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),



190

191

European Commission (February 2021),

The Recovery and Resilience Facility.

European Commission (2020),

The State Aid Temporary Framework.

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

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

Recital 29 BRRD I: “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”,

193

Recital 13 BRRD I:

“The use of resolution tools and powers provided for in this Directive may disrupt

the rights of shareholders and creditors. In particular, the power of the authorities to transfer the shares or

192

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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.

Box 6: Evidence depicting the systemic impact of failing small/mid-sized banks on

financial stability

Small and medium-sized banks, whether purely domestic or cross-border, have an impact

on financial stability; albeit a commensurately smaller one than that of large global

systemic banks. In line with their size, risk footprint, their interconnectedness and their

business strategy, the prudential and liquidity requirements that small and mid-sized

banks are asked to comply with, are proportionately lower than those of large systemic

banks. They may be also granted access to liquidity assistance by central banks (under

all or part of the assets of an institution to a private purchaser without the consent of shareholders affects

the property rights of shareholders. […] Accordingly, resolution action should be taken only where

necessary in the public interest and any interference with rights of shareholders and creditors which

results from resolution action should be compatible with the Charter of Fundamental Rights of the

European Union (the Charter)…”

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eligibility conditions) if needed. They should be also able to fail in an orderly manner

under the harmonised resolution framework if it best achieves the objectives.

This box aims to provide additional references and examples depicting the impact of

small and mid-sized banks on financial stability.

The

Financial Stability Institute (FSI),

part of the Bank for International Settlements

argues in its paper

“How to manage failures of non-systemic banks”

from 2018

194

that

“the

social and economic significance of banks’ activities mean that even the failure of

small, non-systemic banks may entail public interest concerns”.

The paper notes that

insolvency regimes may provide a viable alternative to resolution, while respecting the

principle of no bailout agreed internationally after the global financial crisis of 2008-

2009. The paper also states that “the

unique susceptibility of banks to runs and the role of

even non-systemic banks in the functioning of the real economy through activities such as

deposit-taking and provision of credit and transmission of payments mean that bank

failure is significantly more likely to give rise to public policy concerns than ordinary

corporate failures”.

It analyses the appropriateness of insolvency regimes for dealing

with failing banks and finds that these should fulfil four features in order to be

considered adequate to deal with bank failures: (i) include depositor protection in the

objectives of the insolvency in addition to that of maximising proceeds from asset sales

to satisfy creditor claims, (ii) include wider range of grounds for opening insolvency

regimes (forward looking criteria and likelihood of failure); (iii) role of administrative

authorities and courts; and (iv) more reduced role of creditors in bank versus corporate

insolvency regimes. Otherwise, ordinary corporate insolvency regimes are not best suited

to the specific characteristics of banking business and particular risks that arise when a

bank fails, which motivated the development of resolution regimes.

In a subsequent occasional paper called

“Bank failure management in the European

banking union: What’s wrong and how to fix it” from 2020, the FSI

195

notes that the

EU CMDI framework cannot guarantee the handling of bank failures without taxpayer

money, which is deemed unacceptable as per the international consensus which emerged

following the global financial crisis of 2008-2009. It suggests focusing the reform on

options for dealing with the failures of small and medium-sized banks, by facilitating

greater use of resources from deposit guarantee schemes to fund transfer transactions

(sale of business) in resolution and insolvency. The paper clarifies that there are no

adequate strategies in the Banking Union for dealing with the failure of mid-sized banks

that are too large to be liquidated, but too small and too traditional to be resolved using

bail-in. It recommends that transfer strategies could be the most suitable strategy for

facilitating an orderly exit for failed small and mid-sized banks, but this is hindered by

restrictions to access funding to support such transfer tools (industry funded safety nets).

194

195

Financial Stability Institute (FSI), (October 2018),

How to manage failures of non-systemic banks.

Financial Stability Institute (FSI), (July 2020),

Bank failure management in the European banking

union: What’s wrong and how to fix it

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working paper by the European Systemic Risk Board (ESRB)

from 2021

196

analyses

the impacts of bank failures on the real economy by focusing on the credit channel (i.e.

interruptions to lending causing a temporary credit shortfall due to a sudden closure of a

bank when placed in insolvency proceedings). The paper found that, the application of

the harmonized CMDI framework is especially useful for medium-sized banks, which

can be considered “grey area” or “middle class” institutions, as defined by Restoy et al.

(2020), as it provides insights to reduce the uncertainty on whether their resolution is in

the public interest. At the same time, simulations suggest that the failure of similar banks

could have effects of heterogeneous severity across jurisdictions.

The

US savings and loan crisis from the 1980s

197

refers to very wide-spread contagion

among very small financial institutions dealing with mortgage financing (i.e. exposed to

similar sector of activity), on the backdrop of high inflation and rising interest rates.

There were more than 4,000 such savings and loans institutions in the US in 1980, with

assets totalling USD 600 bn. Given the very high costs to taxpayers of paying insured

deposits in these institutions (roughly USD 25 bn), regulatory forbearance led to having a

large number of insolvent (zombie) institutions still operating on the market, which

worsened the situation. In 1989, the Resolution Trust Corporation closed 747 savings and

loans institutions with assets over USD 407 bn, with an ultimate cost to taxpayers of

USD 124 bn. The use of public money was needed to shield the clients of these

institutions from losing their life savings, as it would have happened were they simply

put in bankruptcy proceedings.

study by the Dutch National Bank

conducted in 2018

198

looked at the implications of

banking sector size on financial stability. Their analysis suggests that the relationship

between banking sector size and financial stability is not clear-cut. For example, several

countries with a large banking sector relative to GDP, such as Iceland and Ireland, were

hit very hard during the crisis, as they bailed-out large banks with significant impact on

sovereign debt. At the same time, however, countries with small, domestically oriented

banking sectors, such as Greece, Italy and Portugal, also turned out to be very vulnerable.

The study finds that, the size of the banking sector relative to GDP is significantly

correlated with most systemic risk measures (as defined by the European Systemic Risk

Board (ESRB) in 2013). However, indicators like domestic orientation and sovereign

exposures are negatively correlated with size, meaning that small banking sectors are less

diversified and tend to be more focused on their home country and government, creating

high concentration risks. Among the conclusions of the paper is that the large

discretionary power of authorities in deciding how to resolve bank failures may also be

an issue.

study entitled ‘Too many to fail’

tabled for a seminar on systemic risk and financial

regulation seminar

199

in 2010 found that it is not only the size that can cause an

196

ESRB (European Systemic Risk Board) (June, 2021),

Measuring the impact of a bank failure on the

real economy: an EU wide analytical framework.

197

Federal Reserve,

Federal Reserve History – Savings and Loans crisis 1980 – 1989.

198

Dutch National Bank (2018),

Size of the banking sector: implications of financial stability.

199

Johannes Gutenberg University Mainz (2010),

Too many to fail,

thesis in the course of the seminar

‘systemic risk and financial regulation’.

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individual bank to be of systemic importance. It is the nature of the bank’s strategy and

its interconnectedness to other banks that can also make it systemic. Many small banks

that are exposed to the same risk factors can be systemic together because they could all

fail at the same time, which would in aggregation have a large effect on the financial

system (“too many to fail”). Archaya et al (2009) also defines systemic risk as the “joint

failure risk arising from the correlation of returns on asset side of bank balance sheets.”

The paper also recalls the significant social cost of liquidating insolvent banks, which can

increase drastically with the number of such banks.

The

examples of bank failures shown in Annex 9

clearly illustrate that, in many cases of

small/mid-sized banks failing, public money or other forms of financial aid (DGS) were

used in the national insolvency proceedings. The reason for using these resources was to

protect financial stability and avoid imposing losses on depositors, which proves that

even small or mid-sized banks cannot be left to simple liquidation, which would not

require additional financial resources.

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

200

For and cross-border banking groups, the BRRD requires that resolution colleges of home and host

authorities are set up to coordinate group-wide resolution strategies and implementation of resolution

action.

201

Such measures can be of a structural, organisational, financial or information-related nature.

202

Article 6(4) BRRD.

203

Nevertheless, within the Banking Union, national competent and resolution authorities carry out their

functions within the framework laid down by Single Supervisory Mechanism Regulation (SSMR) and

SRMR and under the general guidance of the ECB and the SRB. Moreover, if the implementation of

resolution action to a less significant institution requires the use of the SRF, the resolution scheme must be

adopted by the SRB.

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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.

204

205

These powers are laid down both in the BRRD as well as in the CRD and SSMR.

Article 11(3) DGSD.

206

Article 32(4) BRRD.

207

ECB/SSM as the competent authority for all significant banks in the Banking Union and the national

competent authority for all other banks.

208

Each Member State has a specific insolvency hierarchy of claims. Hence, when a bank goes into normal

insolvency proceedings, creditors are allocated to different classes, according to the national ranking of

creditors. See VVA, Grimaldi & Bruegel (2019)

Study on the differences between bank insolvency laws

and on their potential harmonisation

209

Further, the

Eurogroup agreed in November 2020

to introduce a common backstop to the SRF. It will

be provided by the ESM and its size will be aligned to the size of the SRF, up to a nominal cap of

EUR 68 bn. The backstop will be introduced by 2022.

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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

210

211

As of July 2021, the SRF holds approximately EUR 52 bn, see SRB (2021)

Compartments.

Article 44(2) BRRD listing mandatory exclusions from bail-in. Article 44(3) lists discretionary

exclusions from bail-in.

212

Articles 71 SRMR and 104 BRRD.

213

Articles 70 SRMR and 103 BRRD.

214

In certain cases, this level is lowered to 0.5%.

215

As laid down in Article 109 BRRD.

216

As alternative measures laid down in Article 11(6) DGSD.

217

As laid down in Article 11(3) DGSD.

218

As laid down in Article 109 BRRD, Article 11(3) DGSD and Article 11(6) DGSD respectively.

219

Article 11(6) DGSD.

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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

Two requirements have to be met: (i) the target level must be reached by 2024, and (ii) after 2024, if the

fund is depleted, it has to be replenished within 6 years (Article 10(2) DGSD).

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Figure 11: EU resolution and insolvency framework

Timing

Measure/procedure

Responsible

authority

Supervision:

For systemic

banks in the

Banking Union:

SSM

For all others:

national

competent

authorities

* See “resolution”

below

Planning and early

actions

Stress test (by EBA)

Enhanced supervision

Recovery plans (to be prepared by banks)

Resolution plans*, MREL decision (drawn up by resolution authorities)

Supervisory powers (CRD/CRR/SSMR)

Early intervention measures (BRRD)

Preventive and pre-FOLF

Solvency

Assessment:

ECB/national

supervisor

For BRRD

precautionary

measures:

Member State,

COM

For DGSD

preventive

measures:

DGS authority

Is the institution falling or likely to fail?

Failing bank –

Resolution or insolvency

Is it in the public interest to put the

bank into resolution?

Resolution:

For Banking

Union: SRB as

a central

authority

For all others:

National

resolution

authorities

Resolution under

the BRRD

Funding

through bail-in mechanism and

resolution funds

Tools and powers:

selling (parts of) the

bank to an acquirer, transfer critical functions

to a bridge bank, transfer bad assets to an

asset management vehicle or apply bail-in by

reducing creditors’ claims or converting them

into capital to recapitalise the bank

Insolvency:

National

authorities

Source: Commission services

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NNEX

5: E

VALUATION OF THE

CMDI

FRAMEWORK

XECUTIVE

UMMARY

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

221

222

G20 Pittsburgh Summit (September 2009),

Leaders Statement,

paragraph 13, last bullet point.

In its

Communication

of 12 September 2012, “A

Roadmap towards a Banking Union”,

COM

(2012)0510 final, the Commission called for a Banking Union that would place the banking sector on a

more sound footing and restore confidence in the euro as part of a longer term vision for economic and

fiscal integration. The

report

by the Presidents of the European Council, the Commission, the Eurogroup

and the European Central Bank of 26 June 2012

“Towards a genuine Economic and Monetary Union”

endorsed this vision.

223

Provisions complementing the crisis management framework are also present in the Capital

Requirements Regulation (CRR – Regulation (EU) 575/2013) and the Capital Requirements Directive

(CRD – Directive 2013/36/EU). The winding up Directive (2001/24/EC) is also relevant to the framework.

224

Under Article 19(6) DGSD, the Commission, supported by EBA, shall submit to the European

Parliament and the Council a report on the progress towards its implementation by 3 July 2019. This report

has been postponed due to EBA’s work on the technical advice that was completed in January 2020. In this

context, four opinions were submitted by EBA: on

eligibility, coverage level and cooperation agreements,

DGS payouts,

DGS funding and use of DGS funds

and

on the AMLD and DGSD interplay.

The

evaluation covers the assessment of the progress of the implementation of depositor protection rules based

on this work conducted by EBA. Consequently, there will be no other progress report issued.

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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

225

European Commission (November 2015)

Commission proposal for a Regulation of the European

Parliament and of the Council amending Regulation (EU) 806/2014 in order to establish a European

Deposit Insurance Scheme

( “the 2015 EDIS proposal”).

226

See Annex 1.

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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

227

State aid rules are intrinsically interconnected with and are complementary to the CMDI framework.

These rules are not subject to this review and this impact assessment. In order to ensure consistency

between the two frameworks, the

Eurogroup invited the Commission in November 2020

to conduct a

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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).

NTRODUCTION



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.

review of the State aid framework for banks and to complete it, in parallel with, the CMDI review,

ensuring its entry into force at the same time with the updated CMDI framework.

228

Insolvency proceedings across the EU are unharmonised; some allow for certain transfer tools similar to

resolution financed by DGSs, others only allow for piece-meal liquidation proceedings.

229

Throughout this document the terms ‘hierarchy of claims in insolvency’, ‘hierarchy of claims’, ‘creditor

hierarchy’, ‘ranking of claims’ are used as synonyms and describe the same concept.

143

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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.

ACKGROUND 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.

230

See section 3 of the Evaluation, for further details on the 2019 updates of the BRRD/SRMR.

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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

231

European Commission (February 2015)

Competition State aid brief-

State aid to European banks:

returning to viability.

232

European Commission (March 2016),

Commission delegated regulation (EU) 2016/1075

specifying the

content of recovery plans, resolution plans and group resolution plans, […], the conditions for group

financial support, the requirements for independent valuers, the contractual recognition of write-down and

conversion powers, […] and the operational functioning of the resolution colleges.

233

European Commission (February 2016),

Commission delegated regulation (EU) 2016/778

with regard

to the circumstances and conditions under which the payment of extraordinary

ex post

contributions may

be […] deferred, and on the criteria for the determination of […] critical functions.

145

kom (2023) 0228 - Ingen titel

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

234

European Commission (May 2016),

Commission delegated regulation (EU) 2016/1450

specifying the

criteria relating to the methodology for setting the MREL.

235

European Commission (October 2014),

Commission delegated regulation (EU) 2015/63

with regard to

ex ante

contributions to resolution financing arrangements.

236

As part of the

Banking package

(also referred to as the “risk reduction package”) published in the

Official Journal of the EU (OJEU) in June 2019, Regulation (EU) 2019/876 (CRR II), Regulation (EU)

2019/877 (SRMR II) and Directive (EU) 2019/879 (BRRD II) implement a minimum TLAC requirement

for EU G-SIIs applicable as of 27 June 2019 and a revision of the MREL requirement for all banks with

strengthened eligibility and subordination criteria (applicable upon transposition, from 28 December 2020).

237

European Commission (December 2017)

Directive (EU) 2017/2399 (Bank Creditor Hierarchy

Directive),

amending the BRRD as regards the ranking of unsecured debt instruments in insolvency

hierarchy.

238

International fora refer to the Basel Committee on Banking Supervision and the Financial Stability

Board (FSB). EU commitments in these fora refer to incorporating elements of the prudential framework

and extending the resolution framework to tackle the "too big to fail" problem by implementing the Total

Loss Absorbing Capacity (TLAC) Standard into EU law.

239

European Commission Communication (November 2015),

Towards the completion of the Banking

Union.

240

The continuation of critical functions is a resolution objective as provided by Article 31 BRRD.

241

Overarching objective of the resolution framework as per Article 31 BRRD.

146

kom (2023) 0228 - Ingen titel

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

1. Financial stability, market

discipline, continuity of

critical functions for society

4. Protect depositors,

ensure consumer

confidence

CMDI

framework

2. Single market

functioning, level

playing field

3. Minimise recourse to

taxpayer money, weaken

bank-sovereign loop

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.

242

General objective in both BRRD/SRMR and DGSD. Level playing field and the even treatment of

creditors and of banks across Member States is an overarching principle in BRRD/SRMR. In DGSD it is

mentioned as an objective in Recitals 3 and 54 as well as in the 2012 impact assessment.

243

General objective in both BRRD/SRMR and DGSD.

147

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Figure 14: Intervention logic

Context

1. G20 commitment to reduce risks to financial stability stemming from banking crises (September 2009)

2. Communication from the Commission to the European Parliament and the Council ‘A Roadmap

towards a Banking Union’ (September 2012)

Need

Create a European framework to manage the failure of banks by ensuring level playing field, an effective

resolution toolkit and the protection of depositors

EU input

1. Bank Recovery and Resolution Directive (BRRD)

2. Single Resolution Mechanism Regulation (SRMR)

3. Deposit Guarantee Scheme Directive (DGSD)

4. The 2015 EDIS proposal (not yet agreed by the co-legislators)

Objectives

1. Limit risks to financial stability, reduce moral hazard

2. Minimise losses for society, mitigate recourse to taxpayer money, reduce bank-sovereign link

3. Enhance single market in banking, fostering level playing field

4. Protect depositors and ensure consumer confidence

Output

Consistent and legally

predictable rules for handling

failed banks across the EU

Output

Effective early intervention and

resolution toolkit and funding

solutions to manage any failed

bank with minimised recourse to

taxpayer money

Result

Access to funding solutions is

effective and proportionate for all

banks and impact on taxpayers

reduced

Output

Removed discrepancies,

increased robustness and

resilience in depositor

protection across the EU

Result

Failed banks treated in consistent

manner and with legal certainty

across the EU

Result

Depositors are protected in

an even and robust manner

across the EU

Impacts

Enhanced level playing field for the banking sector in the EU

Reduced recourse to tax-payer money, weakened bank-sovereign loop

Increased depositor confidence, reduced risk of deposit runs

Reduced moral hazard (shareholders and creditors bearing losses) and better market discipline

Improved financial stability

Source: Commission services

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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

244

Before the BRRD/SRMR, there were no comprehensive arrangements, at EU level, governing the

orderly resolution of failing banks at national level or for tackling cross-border banking failures. Beyond a

minimum set of arrangements for the winding-up and reorganisation of credit institutions with cross border

branches (Directive

2001/24/EC on the reorganisation and winding up of credit institutions),

no EU

framework existed which set out how and under which conditions authorities should act in the event of a

crisis arising in a bank. Before DGSD,

Directive 94/19/EC on Deposit Guarantee Schemes

set out a

minimum harmonisation of national guarantee systems in the EU Member States for the protection of

depositors, which however, had to be comprehensively revised to restore and maintain depositors’

confidence in the aftermath of the global financial crisis.

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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.

VALUATION 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?

245

246

The payout delays of DGS were set at 4 to 6 weeks from the moment a bank is declared insolvent.

As it has been the case after the failure of the Icelandic banks.

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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?

ETHOD



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

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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

247

248

In 2023 as regards the SRF.

Implementation policies created by resolution authorities evolved between 2017 – 2019 to reflect

developments in delegated regulations, new legal interpretations, increase in coverage (number of

institutions) of applicability of the rules by resolution authorities as part of their phase-in of the rules and

the coming into force of the 2019 Banking package.

249

Public disclosure is only required from 2024 onwards (or from the date of the transitional period set for

each entity, if the period ends after 2024), see Article 3(1), 3

subparagraph, BRRD II.

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banks under its remit and it does not cover less significant institutions in the Banking

Union and other non-Banking Union banks.

MPLEMENTATION

TATE 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

250

251

See also Annex 4 of the impact assessment.

Resolution is considered in the public interest when resolution is necessary for and proportionate to one

or more of the resolution objectives (Article 31 BRRD) and normal insolvency proceedings would not meet

those objectives to the same extent.

252

In the following, reference to the BRRD should be understood as including also corresponding

provisions in the SRMR.

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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

The main challenges are related to (i) the short-term interruption of depositors’ access to their deposits

for payouts, (ii) the cost to the DGS and to the economy, and (iii) the inherent risk of destruction of value

in insolvency.

254

The transposition deadline of Article 13 DGSD was – under specific circumstances laid out by Article

20(1) DGSD – delayed to 31 May 2016.

255

EBA (17 August 2021),

Resolution colleges – Annual report 2020.

253

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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

Resolution plans expected

MREL decisions

to be adopted in the 2021

expected during the

resolution planning

2021 resolution planning

cycle(*)

cycle

Total

120

104

237

(*) Resolution Planning Cycle 2021 runs from April 2021 to March 2022 Source: SRB 2021 annual report.

Number of SRB

banks on 1

January 2021

Number of SRB

banks on 31

December 2021

In addition, over the past years, the SRB developed policy guidance to ensure

convergence in the implementation of the framework

257

. The SRB published operational

guidance on bail-in implementation

258

, critical functions

259

, the public interest

assessment

260

as well as on Brexit and mergers and acquisitions expectations. In its

256

257

SRB (2022),

SRB Annual report 2021.

SRB policy documents.

258

SRB (2020),

Operational guidance on bail-in implementation.

259

SRB (2017),

Critical functions: SRB approach.

260

SRB (2019),

Public interest assessment (PIA): SRB approach,

and 2021 and 2022 updates on

system

wide events in the PIA

and on

deposit guarantee scheme considerations.

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expectations for banks

261

policy document, the SRB outlines best practice on key aspects

of resolvability and sets out a roadmap with general phase-in dates for compliance with

the various dimensions. Over the next four years, banks are expected to develop full

capabilities in a number of areas, including governance, MREL capacity, development of

bail-in playbooks, liquidity and funding in resolution, operational continuity and access

to financial market infrastructures

262

, updating management information systems for bail-

in execution and valuation as well as communication plans, separability and

restructuring, as appropriate.

With respect to the MREL, the SRB’s approach has evolved from being based on

informative targets in 2016, to the gradual inclusion since 2017 of binding requirements

for the largest and most complex banks and the set-up of internal MREL requirements for

subsidiaries, as well as bank-specific adjustments addressing both the quality and

quantity of the MREL. In particular, the impact of the introduction of the 2019 risk

reduction Banking Package has been factored into the SRB resolution planning cycles:

already in 2019 with statutory requirements for global systemically important institutions

(G-SIIs), and through the subsequent reviews to the MREL policy in 2020, 2021

263

and

2022

264

, taking into account developments in level two legislation and other legal

interpretations.

In addition to implementation measures taken by the SRB, resolution authorities outside

the Banking Union have also published policy documents guiding the operational

implementation of the framework.

For the EU as a whole and following the publication of the 2019 Banking package, the

Commission services held two transposition seminars (February and July 2020) and

published two notices providing answers to transposition questions, which clarify certain

legal provisions and are aimed at facilitating implementation.

265

More generally, the

EBA’s Single Rulebook Questions and Answers tool provides replies to a large number

of questions submitted by authorities and industry stakeholders on the interpretation and

application of BRRD and DGSD provisions and of related delegated and implementing

acts. In complement to level one provisions, seventeen implementing and delegated acts

related to the BRRD have been published between 2016 and 2019, providing additional

rules on implementation.

266

Finally, a legislative proposal specifying the method for

indirect issuances of loss absorbing capacity in groups with more than one layer of

ownership (so-called “daisy chains”) has been adopted on 27 October 2022

267

261

262

SRB (April 2020),

Expectations for banks.

SRB (2020),

Operational guidance on operational continuity in resolution

and

Operational guidance

for FMI contingency plans.

263

SRB (May 2021),

2021 MREL policy

264

SRB (June 2022),

2022 MREL policy

265

European Commission (September and November 2020),

(2020/C 321/01) Commission notice relating

to the interpretation of certain legal provisions of the revised bank resolution framework in reply to

questions raised by Member States’ authorities

and (2020/C

417/02) - second Commission Notice.

266

European Commission (2016 - 2019),

Implementing and Delegated Acts on Directive 2014/59/EU

267

European Commission (October 2022),

Regulation (EU) 2022/2036 of the European Parliament and of

the Council of 19 October 2022, as regards the prudential treatment of global systemically important

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State of play of the implementation of the deposit insurance framework

The DGSD has been implemented in all Member States. Nevertheless, the four EBA

reports and opinions

268

, a study contracted by the Commission on national options and

discretions

269

and the outcome of the transposition check substantiate the need to clarify

a number of DGSD provisions in the context of this review

270

The EBA opinions highlighted the scope for clarification of the current text in many

aspects in order to ensure a consistent application of the depositor protection and

depositors’ equal treatment, but also to protect financial stability. The EBA

recommended that the protection of the client funds safeguarded on accounts by non-

bank financial institutions, such as payment and e-money institutions, or investment

firms merits clarification. The lack of protection of such client funds in some Member

States could be acute for both depositors and Fintech providers if bank failures occur and

multiply. In particular, in light of the Brexit context, the treatment of third country

branches should be clarified. EBA also identified the need to clarify the interplay

between the AMLD and DGSD in a payout situation. In terms of robustness of DGS

funding (e.g. alternative funding arrangements and investment strategy), it was

highlighted that many national transpositions do not cater for concrete measures,

available to obtain funds if DGSs are depleted, at the expense of sufficient crisis

preparedness. DGS funds are often invested in sovereign bonds and, in two instances,

even integrated in the budget, which may have unpredictable consequences in the current

COVID-19 induced circumstances

271

Further, the DGSD contains more than 22 ONDs. In general, those ONDs allow the EU

legislator to demonstrate respect for national legal traditions and regulatory practices as

well as to reduce implementation costs, especially in Member States with existing

national frameworks. However, ONDs also have the potential to distort the level playing

field and lead to fragmentation in the single market. In addition, they can create higher

complexity, including higher compliance costs, and reduce transparency.

Most notably, the Commission’s conformity assessment of national transpositions

revealed different approaches with respect to a number of issues and confirmed the need

institutions with a multiple point of entry resolution strategy and methods for the indirect subscription of

instruments eligible for meeting the minimum requirement for own funds and eligible liabilities.

268

See also section 1 of the evaluation and Annex 1.

269

CEPS study

prepared for the Commission on national options and discretions under the DGSD and their

treatment under EDIS (November 2019),

CEPS study.

270

See also Annex 6 of the impact assessment for more details on the DGSD review.

271

In its

opinion

23 January 2020,

on the funding and use of DGSs funds, EBA highlighted that in a

number of cases funds are invested exclusively or almost exclusively in national debt, despite the

requirement to ensure sufficient diversification, the EBA discussed the rationale for requiring that DGS

funds should be invested in a sufficiently diversified manner. In this regard, it should be considered that the

funds are available when needed in a crisis, irrespective of the situation in the market for a particular type

of instrument; in particular, where funds are invested in national debt, to break the nexus between banking

and sovereign crises (p. 106).

157

kom (2023) 0228 - Ingen titel

to clarify certain provisions within the context of the DGSD review. While several of

them could negatively impact either the deposit protection or the equal treatment of

depositors, there are also issues which do not seem to give rise to substantial problems

(e.g. as there are no third country branches in the respective Member States). The

majority of instances identified were divergent approaches i.e. to the determination of

unavailable deposits under Article 2(1)(8) and 3(2) DGSD, the transfer of contributions,

the protection of temporary high balances, alternative and preventive measures, client

funds safeguarded by payment institutions on bank accounts, to the protection of public

authorities

272

or to the share of payment commitments of the total available financial

means under Article 10(3).

State of play of the common deposit guarantee scheme (EDIS) in the Banking Union

The Banking Union from its inception in 2012 was conceived to have three pillars, with

the third being a common system for deposit guarantees

273

. The Commission adopted a

legislative proposal to this end on 24 November 2015 on EDIS

274

, followed by the

publication of an effects analysis in 2016

275

. This proposal was contentious from the start

and political discussions have been stalled for some time, though technical work

remained ongoing. Discussions on the interaction between risk reduction and risk sharing

had an impact on the EDIS negotiations, both within the Council and the European

Parliament, despite continued acknowledgment of the importance of EDIS as part of a

fully-fledged Banking Union, such as in the Five President’s Report of 2015

276

. This is

also reflected in the 2016 Banking Union roadmap

277

by the Council, which signalled that

negotiations at political level on EDIS would start as soon as sufficient further progress

has been made on the measures on risk reduction.

A comprehensive package of risk reduction measures was put forward by the

Commission and negotiated by the co-legislators since then. A Communication that set

out an ambitious yet realistic path to ensure agreement on all the outstanding elements of

the Banking Union, based on existing commitments by the Council, was put forward by

the Commission in 2017

278

. Therein, suggestions were also outlined with regard to the

EDIS proposal in order to facilitate progress in the European Parliament and the Council

on the file.

272

In some Member States, public authorities do not fall under the scope of the DGSD. For example, the

recent Greensill Bank AG case in Germany showed that

public authorities

were not protected by the

mandatory DGS. According to the

German press,

some public authorities (with around EUR 340 m) had

deposits with Greensill bank. However, it remained unclear if the voluntary top-up scheme reimbursed

them.

273

Communication

from the Commission to the European Parliament and the Council, A Roadmap towards

a Banking Union, 12 September 2012, COM(2012)0510 final, and the

report

by the Presidents of the

European Council, the Commission, the Eurogroup and the European Central Bank of 26 June 2012.

274

Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU)

806/2014 in order to establish a European Deposit Insurance Scheme, 24 November 2015, COM(2015) 586

final. For a more detailed description of the 2015 proposal, please see Annex 10 of the impact assessment.

275

Effects analysis

on the European Deposit Insurance Scheme, 11 October 2016.

276

The Five President's Report:

Completing Europe's Economic and Monetary Union, 22 June 2015.

277

Council Conclusions on a Roadmap to complete the Banking Union,

17 June 2016Error!

Bookmark n

ot defined..

278

Communication

to the European Parliament, the Council, the European Central Bank, the European

Economic and Social Committee and the Committee of the Regions on completing the Banking Union,

11.10.2017, COM(2017) 592 final.

158

kom (2023) 0228 - Ingen titel

In June 2018, the Euro Summit asked that work would start on a roadmap for beginning

political negotiations on EDIS

279

and in December 2020, on a stepwise and time-bound

work plan on all outstanding elements needed to complete the Banking Union

280

. This

work, which took place in the intergovernmental format within the HLWG on EDIS, was

broadened to encompass four files: (i) EDIS, (ii) the review of the CMDI framework, (iii)

cross-border integration and (iv) the regulatory treatment of sovereign exposures. Despite

intensive discussions among Member States and a major political effort by the Eurogroup

president, an agreement for completing the Banking Union in a comprehensive manner

did not materialise in the June 2022 Eurogroup

281

The technical discussions that took place on EDIS over the last years gave rise to various

other models than the model proposed by the Commission in 2015

282

. The so-called

hybrid model

283

emerged as a possible compromise

284

between those Member States

supporting the original proposal and those underlining the pre-condition of risk reduction

before agreeing to share risks across the EU banking sector. As outlined in the impact

assessment, EDIS and the review of the CMDI framework are closely interlinked. The

set-up of EDIS would also unlock further market integration, in particular cross-border

consolidation.

NSWERS TO THE EVALUATION QUESTIONS

This section presents the assessment of the CMDI framework based on the five

evaluation criteria (effectiveness, efficiency, relevance, coherence and EU value added)

and related evaluation questions set out in section 4. This is complemented by an

assessment of the main issues coming from past experiences with the framework or raised

by stakeholders during the various consultation activities, as summarised in Annex 2 of

the impact assessment.

7.1. Effectiveness

How effective has the EU intervention been? To what extent have the general

objectives of the CMDI framework (BRRD/SRMR/DGSD) been achieved and what

factors influenced the achievements observed?

As depicted in section 3, the general objectives of the CMDI framework are to:

1. limit potential risks of adverse effects for financial stability caused by the failure

of banks, including by preventing contagion, moral hazard, ensure market

discipline and the continuity of critical functions for the society;

2. minimise losses for the society, in particular mitigate recourse to taxpayers’

money and weaken the bank-sovereign nexus;

279

280

Statement

of the Euro Summit, 29 June 2018.

Statement

of the Euro Summit, 11 December 2020.

281

Eurogroup (16 June 2022),

Eurogroup statement on the future of the Banking Union.

282

For a more detailed description of the other models, please see Annex 10 of the impact assessment.

283

For a more detailed description of the hybrid model, please see Annex 10 of the impact assessment.

284

Letter

by the High-Level Working Group on EDIS Chair to the President of the Eurogroup, ‘Further

strengthening the Banking Union, including EDIS: A roadmap for political negotiations’, 3 December

2019.

159

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3. enhancing the functioning of the single market in banking, including by handling

of cross-border crises and fostering level playing field among banks from

different Member States, particularly in the Banking Union; and

4. protect depositors (covered deposits), investors (covered by investor

compensation schemes) and client assets and funds, thereby ensuring consumer

confidence across the EU, irrespective of the place of incorporation of the bank.

Summary assessment:

Evidence regarding the treatment of bank crisis situations since the adoption of the

framework shows that two of the four objectives of the framework have been 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 objectives of containing risks

to financial stability and protecting depositors, but it failed to achieve other key

overarching objectives, notably facilitating the functioning of the single market when

handling cross-border crises, including by ensuring level playing field, and

minimising recourse to taxpayer money. In a significant number of cases, the

fulfilment of objectives cannot be directly attributed to the framework, but to the

application of tools at national level, outside of resolution and with recourse to public

budgets (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.

The assessment of the framework’s effectiveness has been done objective by objective.

7.1.1. Objective (1): did the framework achieve the objective of limiting risks to

financial stability, including by preventing contagion, moral hazard,

ensuring market discipline and the continuity of critical functions for the

society?

Risks to financial stability, contagion and spillover effects from the banking sector to the

real economy were significantly reduced after the global financial crisis and the society’s

access to critical banking functions

285

was preserved. Certain elements of the framework

and their application such as pre-resolution preparedness had a positive impact on

financial stability, the containment of contagion, reduction of moral hazard and ensuring

market discipline. Similarly, the resolution framework introduced strategies, powers and

tools to restructure failing banks while protecting depositors, financial stability and tax

payers. However, so far resolution has only scarcely been applied, in particular in the

Banking Union under the SRMR. A lack of application of those critical elements of the

285

Examples of critical functions include the continued access to deposits and client funds, to payment and

settlement systems, lending or other banking services which cannot be easily and timely substituted in case

of a bank failure.

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kom (2023) 0228 - Ingen titel

framework in the majority of assessed cases of banks in distress

286

was observed. In those

cases, the preservation of financial stability was possible, to a great extent, through the

application of other tools and funding resources at national level, which were available to

manage failing banks or to intervene before failure. The conditions to activate such tools

vary substantially across countries, are sometimes not fully framed in the EU legislation

or leave room for arbitrage

287

. In addition, when funding (mostly from public budgets)

was used to support such measures, the requirements to access such funding were very

different (and more specifically, funding outside resolution is generally more easily

accessible than in resolution, in particular for certain banks, as explained in more details

in section 7.1.2.3). All in all, despite the good progress made in resolution preparedness

and contingency planning, the lack of application of the resolution tools (in many cases),

led to a lack of certainty and predictability in the handling of a distressed bank (break in

the continuum of outcomes from going to gone concern) while the central principle that

taxpayers’ money should not be used in the handling of a bank failure, was not fully

respected.

In conclusion, the partial achievement of this objective can only be partially credited to

the CMDI framework, which was applied in a restricted manner, especially in the

Banking Union.

Main factors influencing the objective’s achievement

Factors influencing performance against Overall impact on objective

objective

1) Level of crisis preparedness and resolvability

Positive

(ex

ante

contingency planning

of banks

in form of recovery and resolution

plans, resolution strategies, enhanced

coordination,

increased

banks’

resolvability with some aspects still

work in progress (MREL compliance,

management information systems

(MIS), liquidity in resolution)

Reduction of “too big to fail” and moral

Mainly positive

(reduction of funding

hazard problems

cost advantage for G-SIIs, increase in

bail-inable own resources, more

adequate pricing of risk by investors,

however most cases of distressed

banks dealt outside resolution, senior

unsecured creditors did not bear

losses)

3) Effectiveness of the early intervention

Negative

(scarcely applied)

framework

4) Availability of resolution processes, powers

Mainly positive

(enhanced market

and tools to intervene in failing banks

discipline,

however

lack

application)

286

Since 2015, more than 60% of banks in distress in the EU were managed outside of the resolution

framework. (See Annex 9 of the impact assessment:

“Table of Bank cases since 2015”).

287

See also sections 7.1.2.3 and 7.1.3 of the Evaluation for further details on the relevant issue.

161

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7.1.1.1. Level of crisis preparedness and resolvability of banks

The BRRD/SRMR requires institutions and authorities to develop

ex ante

contingency

planning (recovery and resolution plans) and update these plans on a yearly basis. It

requires banks to prepare recovery plans to overcome financial distress and it grants

resolution authorities powers to collect information and prepare resolution plans laying

out the resolution strategy and tools aimed at an orderly resolution of the failed bank with

minimal costs for taxpayers. The framework requires authorities to conduct regular

resolvability assessments to identify and remove any impediments to resolvability.

As also described in section 6, significant progress was achieved by resolution authorities

in drawing up resolution plans, assessing banks’ resolvability and setting MREL

requirements and by banks in drawing up recovery plans and, generally, becoming more

resolvable than they were before the introduction of the framework. While

implementation in certain areas is still ongoing (e.g. setting internal MREL for

subsidiaries, overall MREL compliance and enhancement in other areas of resolvability),

the enhanced level of preparedness of the financial system contributed to achieving

financial stability.

7.1.1.2. Reduction of ‘too big to fail’ and moral hazard problems

Prior to the CMDI reforms, the failure of a vast majority of financial institutions

(including in particular the ones deemed too big to fail) was addressed through

government bail-outs to prevent contagion and financial instability or to mitigate

significant negative consequences for the real economy. The option of placing financial

institutions in insolvency was deemed likely to lead to great destruction of value, costly

litigation and contagion, threatening financial stability. The expectation that a bank may

be bailed-out represented an implicit government subsidy, with implications on the

behaviour of banks and markets

288

. With the granting of public support, such implicit

subsidies turned into explicit subsidies, discouraging the banks from bearing the

consequences of their decisions. Such resulting moral hazard caused economic

distortions by providing funding cost advantages, conducive to insufficient market

discipline and excessive risk-taking to the detriment of competition. The latter also

weakened the overall resilience of the financial system and the provision of financing to

the real economy.

The Financial Stability Board (FSB) assessed in 2020–2021 the impact of resolution

reforms in member jurisdictions on reducing the too big to fail problem.

289

In the absence

of concrete cases of G-SIIs failing, the FSB report looked at how the reforms, including

the CMDI framework in the EU, addressed the observed shortcomings, i.e. reduced the

implicit funding subsidies enjoyed by large banks, increased the creditors’ risk

sensitivity, the de-risking of balance sheets and corporate/legal changes as a result of

resolvability improvements. The FSB’s report concluded that, while the indicators of

288

E.g. creditors may be more willing to fund banks that are too big to fail at lower rates than other banks

and may be insensitive to the credit risk of the borrower.

289

Financial Stability Board (April 2021),

Report on the Evaluation of the Effects of the Too Big to Fail

Reforms

162

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systemic risk and moral hazard have moved in the right direction with potential net

benefits to the society, there are still gaps to be addressed. These include: obstacles to

resolvability (e.g. resolution funding mechanisms, build-up of buffers, valuation

capabilities, cross-border coordination), continued state support for some distressed

banks (EU examples

290

), room to improve on data disclosure and transparency to markets

and potential risks arising from a shift of credit intermediation to non-bank financial

intermediaries.

Judging from the practical application of the CMDI framework, the moral hazard

problem is not satisfactorily reduced, as senior unsecured creditors continued in some

cases to avoid bearing losses, with direct consequence for public finances.

7.1.1.3. Effectiveness of the early intervention framework

The BRRD provides supervisory authorities with the powers to apply EIMs, which are

intended to prevent further deterioration of the financial conditions of an institution and

to reduce, to the extent possible, the risk and impact of a possible resolution One of the

operational objectives of the EIM framework was to allow the competent authority to

intervene rapidly in order to address the financial deterioration of banks in case of

breaches/likely breaches of prudential requirements. These powers are activated when

specific triggers

291

are met, to allow competent authorities to take measures such as

requiring the institution’s management to draw up an action programme or to change the

institution’s business strategy or its legal and operational structure. Competent authorities

can, in this context, also replace the institution’s management

292

As also pointed out by the Commission’s 2019 report on the application of BRRD, while

the policy objectives of the EIMs are to strengthen financial stability, avoid contagion

and moral hazard, its application so far has been extremely limited. The EBA indicated

that, in most situations where the EIM triggers were met, competent authorities decided

to address the situation through the use of supervisory powers (e.g. measures based on

Article 104 CRD, which are mirrored in Article 16 of the SSMR)

293

. The EBA grouped

the challenges that competent authorities encountered in the application of the current

regulatory framework on EIMs in three categories

294

See Annex 9 of the impact assessment: “Table of Bank cases since 2015”.

Article 27 BRRD provides power to competent authorities to activate early intervention measures when

“an institution infringes or due,

inter alia,

to a rapidly deteriorating financial condition, including

deteriorating liquidity situation, increasing level of leverage, non-performing loans or concentration of

exposures, as assessed on the basis of a set of triggers, which may include the institution’s own funds

requirement plus 1.5 percentage points, is likely in the near future to infringe the requirements of

Regulation (EU) No 575/2013, Directive 2013/36/EU, Title II of Directive 2014/65/EU or any of Articles 3

to 7, 14 to 17, and 24, 25 and 26 of Regulation (EU) No 600/2014 […]”

292

Such a decision was taken in 2019 by the ECB with respect to Carige bank (Cassa di Risparmio di

Genova e Liguria). See ECB’s press release (2 January 2019),

ECB appoints temporary administrators for

Banca Carige.

293

See EBA (27 May 2021),

Report on the application of early intervention measures in the European

Union in accordance with Articles 27-29 of the BRRD,

EBA/REP/2021/12 (EBA report) pp 17-19.

294

See EBA report, pp 23-25.

290

291

163

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The first set of challenges in the application of EIMs, relate to the interaction between,

and potential overlap

295

of, early intervention powers conferred to competent authorities

on the basis of national laws implementing the BRRD and the supervisory powers which

they can exercise under CRD. The overlap between these two sets of measures creates

legal uncertainty and procedural challenges for competent authorities and merits further

analysis. Also, with respect to the Banking Union, the provisions on early intervention

powers contained in the BRRD are not replicated in a uniform and directly applicable

legal basis, i.e. their application by competent authorities may hinge on potentially

diverging national transposition measures.

A second set of challenges, relates to disclosure requirements and the signalling effect

that the EIMs may entail. According to the EBA, there is uncertainty whether institutions

are obliged to disclose to market participants the fact that EIMs have been applied to

them under the EU market abuse regime. In case the adoption of the EIMs has to be

disclosed, there could be a risk of signalling to markets that the bank is in a deteriorating

situation, leading to adverse investor reactions and ultimately accelerating instead of

mitigating an ongoing crisis.

A final challenge in the application of the EIMs relates to the specific triggers for their

application. Article 27(1) BRRD includes one example of EIM quantitative trigger

‘the

institution’s own funds requirement plus 1.5 percentage points’.

However, it is not clear

from the BRRD text, which “own funds requirement” should be used for the purposes of

this provision i.e. the one corresponding to the minimum capital requirement (Pillar 1) or

also taking into account additional own fund requirements (Pillar 2).

7.1.1.4. Availability of resolution processes, powers and tools to intervene in

failing banks

The BRRD/SRMR provides extensive processes, powers and tools for resolution

authorities to handle failed banks in an orderly manner, while respecting the framework’s

objectives. The framework sets comprehensive coordination processes among various

authorities to assure the necessary exchange of information underpinning resolution

decisions concerning both preparation and execution. It ensures that shareholders and

creditors effectively support losses and establishes a number of resolution tools for the

authorities to deal with banks in resolution. Depending on the specific case, authorities

may decide to use the sale of business tool, to create a bridge bank or an asset

management vehicle, and to carry out bail-in

296

. The framework also provides for rules

concerning the provision of external financial support to banks in resolution through the

creation of resolution financing arrangements, funded by levies

ex ante

collected from the

banks.

The set-up and availability of said resolution processes, powers and tools has an overall

positive effect on financial stability, potentially reducing moral hazard and ensuring the

295

This overlap can be verified in what concerns the powers at the disposal of competent authorities under

the two different legal bases and also the conditions for the respective use.

296

Bail-in is defined in BRRD/SRMR as “the

mechanism for effecting the exercise by a resolution

authority of the write-down and conversion powers in relation to liabilities of an institution under

resolution […]”

(Article 2(1)(57) BRRD and Article 3(1)(33) SRMR).

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preservation of critical functions. However, existing exogenous and endogenous

incentives, not to apply the resolution framework

297

cause significant drawbacks in

achieving other objectives, i.e. enhancing the functioning of the single market and level

playing field, reducing moral hazard and the recourse to taxpayer money (see next

Sections),

while preserving financial stability.

7.1.2. Objective (2): Did the framework achieve the objective of minimising losses

for the society, in particular mitigating the recourse to taxpayer money and

weakening the bank-sovereign nexus?

One of the cornerstones of the current framework is the objective of shielding public

money from the effects of bank failures, while protecting depositors and preserving

financial stability. In order to limit the extensive use of public funds observed during the

global financial crisis, the framework created resolution tools and financing arrangements

complementing the internal loss absorption of banks (e.g. RF/SRF, national DGS funds)

aimed at shielding national budgets.

Nevertheless, in the Banking Union, while there were only three cases of a positive

PIA

298

under the SRMR, SRF resources were not used and the accumulated resources

remain idle since 2016. National RFs have been used in ten out of 13 cases of failing

banks

299

with positive PIA determination, representing less than half of the total number

of cases of distressed banks. On the contrary, public funds have provided support in 2 out

of 9 of the cases of distressed banks with negative PIA, amounting to over EUR 17 bn,

while an additional amount of almost EUR 40 bn of public funds were used for

precautionary aid measures (of which around EUR 28 bn was for precautionary liquidity

support). This evidence indicates that the framework failed to achieve this objective in a

satisfactory manner in all cases.

297

298

See for more details section 7.1.2.1 of the Evaluation.

Two out of these three cases concern the resolution of entities belonging to the Sberbank Europe AG

group (see Annex 9 for more details), whereby due to the very special circumstances the group was faced

with (experiencing significant deposit outflows due to the reputational impact of geopolitical tensions)

there was a deviation from the resolution plan (which provided for the preservation of the group structure)

and different solutions (resolution/liquidation) where applied to different banking entities of the group.

299

In seven of those cases, the intervention took place before the minimum BRRD bail-in requirement

entered into force on 1 January 2016. In addition, four of those cases concerned Banking Union Member

States, but they took place before the SRB becoming the responsible resolution authority.

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Main factors influencing the objective’s achievement

Factors influencing performance against objective

Overall impact on objective

1) Availability and usage of private financing

Negative

(private financing arrangements

arrangements for bank resolution

scarcely used under the SRMR)

2) Timeliness of FOLF determination

Negative

(timing for triggering FOLF can

be improved to address the depletion of

resources and destruction of value in the

run up to resolution, and the related need

for more external funding (possibly

public))

Negative

(divergent access requirements

for the resolution fund

versus

funding

outside resolution, difficulty in accessing

resolution funding by certain banks,

limited scope to grant DGS funding in

resolution and insolvency)

3) Conditions to access external funding

7.1.2.1. Availability and usage of private financing arrangements for bank

resolution

The framework provides for rules concerning the provision of external financial support

to banks in resolution and requires the creation of national resolution financing

arrangements (outside the Banking Union) and the SRF (in the Banking Union) – funded

by the industry – which, according to the BRRD/SRMR, should be the main sources of

external financial support for banks in resolution beyond the own resources of the banks.

The SRF was established under the control of the SRB as an essential part of the Single

Resolution Mechanism and is governed by a complementary inter-governmental

agreement. The total target size of the funds/ SRF will equal at least 1% of the covered

deposits of all banks in the respective Member States/ Banking Union.

Ex ante

contributions to national resolution funds/ SRF are accruing over eight years, beginning

in 2016 until the end of 2023 and 2024 for the SRF and national RFs, respectively.

Subject to conditions laid out in BRRD/SRMR (a minimum level of bail-in of the bank’s

own resources), the national RF/SRF could be accessed, and in that case

ex post

contributions may be called on to rebuild the funds (in case the

ex ante

contributions are

not sufficient to cover the losses, costs or other expenses incurred).

Subject to the availability of funds in the national RF/SRF, the legislative intention was

for these resources to be used to support resolution action when the private means

available in the bank did not suffice to execute the resolution strategy. In the Banking

Union, while there were only three cases of a positive PIA

300

, SRF resources were not

used and the accumulated resources remain idle since 2016. National RFs were used in

non-Banking Union Member States and in some Banking Union Member States, but

300

Two out of these three cases concerned the resolution of Sberbank group (see Annex 9 for more details).

166

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before the 8% minimum TLOF bail-in requirement entered into force

301

, in ten out of 13

cases of banks placed in resolution for a total amount of at least EUR 6.9 bn

302303

However, when looking at the broader picture, the contribution of the RFs dwarfs in

comparison to the amount deriving from other sources of funding (mostly from public

budgets) to handle distressed banks, outside of resolution, which exceeded EUR 58 bn (of

which EUR 28.1 bn was provided for liquidity purposes)

304,305

Figure 15: Sources of complementary external funding in crisis cases (in EUR bn)

Source: European Commission calculations, based on bank cases between 2015 – 2022.

The causes for this situation seem to be twofold. First, certain banks would face structural

difficulties in fulfilling the conditions to access resolution funding where the bail-in

requirement would entail bailing-in ordinary unsecured creditors, including non-

preferred, non-covered deposits

306

, which could be politically unpalatable and creating

financial stability risks. Second, different resolution authorities would seemingly have

different propensities to deploy the resolution funds.

301

302

On 1 January 2016.

Includes an 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 information).

303

Information on the amounts of national resolution funds contributed in some of the bank cases are not

publicly available.

304

As also mentioned in section 5, while legacy issues may have played a role in past cases and can be

expected to have a lesser impact going forward, this does not impair the validity of the considerations made

in this or other Sections of the evaluation, nor it puts into question the need to reform the framework to

ensure efficacy in managing potential future crises.

305

Without counting support channeled to preventive private or preventive public measures that have been

assessed as market conform.

306

See section 7.1.2.3 and Annexes 7 and 8 of the impact assessment for further details. As explained in

Annex 8, section 2, non-covered, non-preferred deposits rank together with ordinary unsecured claims in

19 Member States (no depositor preference). Moreover, as presented in Annex 7, section 3, depending on

the equity depletion at the moment of failure and the liability structure, in particular the deposit prevalence

of medium-sized banks, preferred and even covered deposits could be impacted when bailing-in 8% TLOF,

in order to gain access to the RF/SRF.

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Recent cases of distressed banks reveal, therefore, a shift from the intended use of the

means of funding available in resolution towards public funds (bail-outs) facilitated by

the application of tools outside the resolution framework and with funding accessible

under different and often more advantageous conditions from the point of view of the

bank’s creditors and very discretionary PIA

307

. This means, in practice, that national

budgets shouldered distressed banks, while private money raised through

ex ante

industry

contributions remained unused, undermining one of the key objectives of the framework.

Please refer to Section 7.2.2.2 describing the costs associated with the build-up of

resolution funds by the industry.

7.1.2.2. Timeliness of FOLF determination

The timeliness of the FOLF determination is crucial with respect to the amount of private

resources left in the bank to execute the resolution strategy. In the current framework, the

FOLF determination is usually made by the competent authority

308

. While the competent

authority needs to comply with the conditions laid down in Article 32 BRRD/18 SRMR,

in the absence of a hard trigger, the framework allows a certain amount of discretion for

the supervisor as to the exact timing of the FOLF determination. Therefore, the

supervisor needs to balance out the severity of the deterioration in the banks’ financial

fundamentals against a potential recovery by private means and take a timely decision.

While it is very challenging to quantify the impact of a late FOLF triggering on the

amount of financing required in resolution, it can be ascertained that a relatively “early”

FOLF determination may ensure that more financial resources are left in the bank to

absorb losses. On the contrary, a “late” FOLF determination results in a more significant

depletion before resolution of equity and potentially other instruments that could be

triggered in resolution as well as a depletion of liquidity. As the situation of the bank

deteriorates further short-term funding providers may refrain from rolling over their

commitments and depositors may potentially run on the bank.

The governance structure and the degree of cooperation between competent and

resolution authorities may play a role in the timeliness of the FOLF determination. In

Member States outside the Banking Union, where competent and resolution authorities

are often part of the same institution, the continuum between going concern, deterioration

(FOLF declaration) and resolution may be better served than in the Banking Union,

where the governance and hence, the decision-making, in a crisis scenario, are split

between the central authorities (ECB and SRB), but possibly also involving national

competent authorities and national resolution authorities. Those decisions are, however,

interdependent and require the close coordination of the authorities and an alignment of

their (sometimes) different incentives for acting early, or waiting for more time to elapse,

before taking their respective actions, when faced with a bank crisis situation. On the one

hand it is important to ensure that FOLF is declared only when the respective conditions

307

Paragraphs 40-42 of the 2013 Banking Communication set out the minimum burden-sharing

requirement for equity, hybrid capital holders and subordinated debt holders in those cases. See also Box 9

in section 7.1.2.3 regarding the

“Divergences in conditions to access funding for resolution fund and for

funding outside resolution under the State aid framework”.

308

In addition to the competent authority, the resolution authority may make the FOLF determination,

subject to specific conditions set out in Article 32(2) BRRD.

168

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are fulfilled to ensure that the FOLF determination is legally sound. On the other hand,

the practice so far showed a risk of overly cautious approach to FOLF declarations in the

Banking Union, which may negatively impact the room for manoeuvre in resolution for

the resolution authority. The BRRD takes this into account to a certain degree, by

providing Member States with the option to enable also the resolution authority to make a

FOLF determination, which the SRMR also foresees for the SRB, subject to certain

conditions. This procedure, however, encounters other limitations, mainly related to the

fact that the elements necessary for a FOLF determination are generally known by the

supervisor, which continuously monitors the bank’s situation.

7.1.2.3. Conditions to access external funding

The availability of sufficient sources of funding in resolution and the provision of

proportionate conditions to access them are central to ensuring that the resolution

framework is adequate to cater for potentially any bank’s failure. The CMDI framework

provides for two sources of funding resolution measures: the national RF/SRF in the

Banking Union and the DGS funds, provided that conditions to access these sources are

met.

Outside resolution, past experiences with preventive measures (precautionary measures

and DGSD preventive measures have shown the use of either public funds under State

aid rules (including in the form of market-conform public measures, the conformity of

which with market conditions are also assessed under these rules but do not qualify as

State aid

309

) or private means to avert the further deterioration of a bank in distress. Also,

under certain insolvency proceedings in some Member States, which allow for transfer

tools (i.e. the sale of a part of the business/ deposits to an acquirer), State aid funding can

be used, provided it complies with the required burden sharing conditions.

The following sub-sections develop: (a) the ineffective funding options for some banks,

(b) the divergent conditions for accessing funding from the resolution fund and other

sources of funding outside resolution, and (c) the use of DGS funds, which together have

contributed to the use of public money (bail-outs) in crisis management.

a) structural difficulties for some banks in fulfilling the minimum conditions for

accessing the RF/SRF under the resolution rules, which may incentivise

authorities to find other solutions when such banks enter into distress;

b) divergent access requirements for the resolution fund and for funding outside

resolution;

c) limited scope to grant DGS funding in resolution and insolvency, with the risk of

weakening the available funding sources for handling a bank failure.

309

Refers to measures carried out by a public body, in line with normal market conditions, therefore are not

considered to constitute State aid.

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kom (2023) 0228 - Ingen titel

a) Challenges for some banks to access the RF/SRF

Impact of resolution strategies

The CMDI framework makes the access to the RF/SRF conditional on bailing-in

shareholders and creditors for no less than 8% of total liabilities including own funds

(TLOF) and limits the contribution of the fund to 5% TLOF

310

. The minimum 8% TLOF

bail-in requirement and subsequent 5% cap on the use of the RF/SRF do not apply in

terms of the use of the RF/SRF for the provision of liquidity in resolution.

311

As part of resolution planning, resolution authorities are defining the preferred and

variant resolution strategies and preparing the application of the relevant tools to ensure

their execution

312

. For large and complex institutions, open-bank bail-in is, in general,

expected to be the preferred resolution tool, implying the write-down and conversion of

own funds and eligible liabilities to absorb losses and recapitalise the bank emerging

from resolution. The successful execution of this strategy comes hand in hand with the

minimum requirement to hold sufficient own funds and eligible liabilities (MREL),

therefore, the calibration of MREL and the build-up of MREL buffers by banks

contribute to ensuring that they can fulfil the condition for accessing resolution funding.

In view of this principle, the changes to the calibration of the overall MREL requirement

and MREL subordination under the 2019 revision of the rules (BRRD II/SRMR II)

sought to increase the certainty of meeting the minimum 8% TLOF requirement,

especially for large institutions.

In parallel, certain smaller and medium-sized institutions with business models based

predominantly on funding through equity and deposits may be candidates for transfer

tool strategies. Transfer strategies involve selling parts or all of the business to a

purchaser, transferring critical functions and related assets and liabilities to a bridge

institution and transferring non-performing assets to an asset management vehicle. A mix

of tools can also be part of the optimal strategy, depending on a case-by-case assessment

by resolution authorities. The potential benefits of transfer tools depend on the

characteristics of the banks and their financial situation and on how the specific transfer

transaction is structured. Challenges to transfer strategies may be due, among other

factors, to “overcapacity” in the EU banking sector, which, on average, struggles to

remunerate capital, further diminishing returns on mergers and acquisitions. Therefore,

the “franchise value” of some ailing banks may be small and potential buyers would

often be willing to enter into a deal only at negative prices. Hence, depending on the

valuation of assets and the perimeter of a transfer, there may still be a need to access the

310

Article 44(5) BRRD requires a minimum bail-in of 8% TLOF and provides for a maximum RF

contribution of 5% TLOF (unless all unsecured, non-preferred liabilities, other than eligible deposits, have

been written down or converted in full) when a resolution authority decides to exclude or partially exclude

an eligible liability or class of eligible liabilities, and the losses that would have been borne by those

liabilities have not been passed on fully to other creditors, or when the use of the RF indirectly results in

part of the losses being passed on to the RF (Article 101(2) BRRD).

311

According to the informal interpretation of the Commission’s services of the provisions in

Article 101 BRRD, which are replicated in Article 76 in the SRMR and that set out the purposes for the use

of the RF/SRF.

312

In light with recital, 20 of the

Commission delegated regulation (EU) 2016/1075,

resolution authorities

should also assess whether liquidation under normal insolvency proceedings can credibly and feasibly

achieve the resolution objectives.

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kom (2023) 0228 - Ingen titel

RF/SRF

313

by complying with the access conditions, in order to complete the transfer

transaction. The level of the MREL requirement reflects the preferred resolution strategy,

meaning that banks under a transfer strategy may be allowed lower MREL targets, taking

into consideration that the main purpose of these strategies is to facilitate the exit of these

banks (in whole or in part) from the market and that MREL will be mainly used, in such

cases for loss absorption and only to, a limited degree, for recapitalisation purposes

314

Conversely, banks under an open bank bail-in strategy, will continue to operate in the

market, on a standalone basis, therefore they would require a higher MREL buffer in

order to absorb losses and fully rebuild their capital base.

Importantly, the need to access resolution funding may arise for any bank (whether

executing an open bank bail-in or a transfer strategy). However, despite differences in

MREL requirements reflecting different resolution strategies, in line with the bank’s

systemic footprint and complexity, the conditions to access the RF/SRF are the same for

any bank, without any distinction on grounds of proportionality based on the planned

resolution strategy, size and business model. This means that a large bank with open bank

bail-in strategy (expected to build-up MREL buffers to cover its loss absorption and

recapitalisation needs), must fulfil the same minimum 8% TLOF bail-in condition to

access the fund as a smaller, deposit taking bank under a transfer strategy leading to exit

of the market and which would be required to hold a lower amount of MREL resources.

The ability of banks to fulfil the access conditions to the RF/SRF depends therefore on

the stock of bail-inable instruments

315

available at the time of the intervention. In order to

assess the ability of EU banks to access the fund, quantitative analyses have been carried

out on (i) the level of MREL shortfalls as of the most recent reporting date (Q4 2020);

and (ii) the structure of banks’ liabilities, in particular assessing whether deposits would

be subject to bail-in in order to access the fund.

MREL shortfalls

The build-up of MREL buffers by banks is in transitional period, with full compliance

required for the majority of banks by 1 January 2024, while intermediary targets were to

be met by 1 January 2022.

According to the most recent EBA 2022 quantitative MREL report

316

, as of Q4 2021, out

of 245 resolution groups in the sample, 70 EU resolution groups (and individual

resolution entities) had an MREL shortfall estimated at EUR 33 bn, down by 42%

compared to Q4 2020 on a comparable basis. The reduction in shortfalls should be

considered against strong issuance levels in 2021 and 2022.

313

The DGS may also be used in resolution, for ensuring continued access for covered depositors to their

deposits in line with the access conditions of Article 109 BRRD.

314

In the case of a bridge institution, the smaller perimeter of the assets transferred and the consequent

reduction in the risk weighted assets, as well as the non or limited assumption of new activities, implies a

smaller amount of recapitalisation needs than if the bank were to continue to operate in the market on a

going concern basis.

315

These would be instruments that could be bailed-in, without giving rise to a right for exclusions or

voluntary exclusions from bail-in, in light of Article 44(3) BRRD (for example for reasons of avoiding

widespread contagion, disruption to critical functions, etc.)

316

EBA (January 2023),

EBA quantitative MREL report and impact assessment

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kom (2023) 0228 - Ingen titel

In the Banking Union, as per the SRB’s MREL Dashboard as of Q3 2022

317

showing

BRRD II/SRMR II data, the average final MREL target represented 23.3% of total risk

exposure amount (TREA) (EUR 1 760 bn), and 26.4% TREA (EUR 1 988 bn) when

including the combined buffer requirement, growing over the quarter driven by the

expansions of banks’ balance sheets. In terms of build-up of eligible instruments, the

average stock of MREL eligible liabilities and own funds reached EUR 2 353 bn, up by

EUR 134.2 bn (or 6%) year-on-year. This trend was in line with the banks’ funding plans

to meet the biding final MREL targets by 1 January 2024. The average MREL shortfalls

against the final target (2024) amounted to 0.2% TREA (EUR 18.1 bn) in Q3 2022, and

0.4% TREA (EUR 30.5 bn) when including the combined buffer requirement.

While compliance with MREL targets is a matter of transitional period and most banks

are expected to fulfil their requirements once the transitional period expired, certain

banks may be facing more structural issues to comply with their requirement.

See Annex 13, for a full overview of the MREL shortfalls and the build-up of the buffers

during the transitional period.

Structural issues in issuing MREL eligible instruments and the likelihood of bailing-

in deposits

Analyses show that certain smaller and medium-sized banks face structural difficulties in

fulfilling the minimum 8% TLOF condition to access resolution funding. These

challenges are due to the liability structure of these banks, which rely significantly on

equity and deposits for their funding and are not into the business of issuing debt to raise

(subordinated) resolution buffers. Some of the barriers hindering a switch in business

model for such banks include, but are not limited to: (i) increased costs to issue

(subordinated) debt in addition to or substituting existing funding due to perceived risks

by investors, which would translate into higher spreads

318

, (ii) lack of, or poor rating, (iii)

not being listed and (iv) potential lack of demand by the market. Such challenges in

accessing resolution funding may be difficult to eliminate in the short to medium-term, in

particular in the current environment of low profitability driven mainly by over-capacity,

competition from the fintech sector and upcoming new regulatory requirements which

may impact balance sheets (Basel III).

See also Annex 13 for more information on such structural issues.

317

318

SRB (February 2023),

SRB MREL Dashboard Q3 2022

Replacing deposit funding and/or secured funding by subordinated or even senior unsecured issuances

could be costly.

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Box 7: Excerpt speech by Governor Visco at Banca d’Italia conference (15 January

2021)

319

on the ability of some banks to issue debt

“One fundamental question concerns the sources of funding to finance a transfer

strategy, be it in resolution or in liquidation. Under the current BRRD framework, a

successful resolution strategy premised on the bail-in tool requires adequate levels of

eligible liabilities (Minimum Requirement for own funds and Eligible Liabilities, MREL),

preferably subordinated, to avoid losses being imposed on depositors and other retail

creditors.

However, most medium-sized banks (not to mention smaller ones) are not equipped to

tap capital markets in order to issue MREL instruments. Around 70% of the significant

banks under the direct supervision of the ECB are not listed, 60% have never issued

convertible instruments, and 25% have not even issued subordinated debt. These shares

rise sharply, of course, for smaller institutions. Requiring these banks to issue MREL

eligible liabilities to non-retail investors would therefore force them to resort to the

wholesale market, obtain a credit rating and change their funding structure significantly.

It could therefore have a strong impact on banks’ margins and even force some of them

out of the market, since issuance costs could prove too high to bear.”

Analysed data shows that for some banks, the stock of bail-inable liabilities excluding

deposits is lower than the minimum requirement for bail-in in order to access the

RF/SRF. This means that, in order for these banks to gain access to resolution funding

(i.e. minimum 8% TLOF bail-in condition), some deposits

320

would need to be bailed-in.

While in some Member States this is feasible and has been done in the past, in the

majority of Member States bailing-in deposits may not be socially acceptable, since

depositors are considered differently from investors. Depositors use banks, primarily, as

a secure place for placing their savings, for meeting future needs, while the investors take

a claim in the bank after having analysed the related risks and rewards. Moreover,

bailing-in deposits would negatively impact the franchise value, which would impair the

success of a transfer transaction to a purchaser, who may be interested in acquiring the

entire deposit book. In the majority of Member States, maintaining the integrity of

deposits is considered by the national authorities, instrumental to bank intermediation in

the economy (i.e. channelling savings into investments and lending) and an important

element to financial stability and the functioning of the payment system.

321

Banca d’Italia (15 January 2021),

Welcome address by Governor Ignazio Visco.

Such as deposits not covered and not preferred, i.e. deposits to corporates, governments, other financial

institutions, other institutions.

321

The significance of deposits for the banking systems is recognised in the BRRD. Article 108 BRRD

requires from Member States to give deposits of individuals and SMEs a higher ranking in national

insolvency than the claims of ordinary unsecured, non-preferred creditors.

319

320

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Box 8: Case illustrating issues regarding funding options - the Getin Noble Bank S.A.

case

Getin Noble Bank S.A. was among the ten largest Polish banks with total assets of

approximately EUR 9.2 bn (PLN 44 bn). On 30 September 2022, based on the opinion of

the Polish Financial Supervision Authority (Komisja Nadzoru Finansowego, ‘KNF'), the

Polish national resolution authority (Bankowy Fundusz Gwarancyjny, ‘BFG') formally

declared the bank to be FOLF and determined that placing the bank into resolution

(rather than to follow insolvency proceedings under national law) was in the public

interest (positive PIA). Subsequently, the bank was resolved with the use of the bridge

bank and bail-in tools. Equity and subordinated debt were fully written down to absorb

(part of) the losses. The bridge bank serves as a temporary solution to provide sufficient

time to organise an orderly sales process for the assets and liabilities transferred to the

bridge bank. The BFG, which is responsible for both the resolution of banks and the

guarantee of deposits in Poland provided the newly created bridge bank with direct

support measures in the form of cash injections worth around EUR 1.4 bn (PLN 6.9 bn)

that were financed through (i) the national resolution fund; and (ii) the national deposit

guarantee fund, both under the BFG's responsibility.

In addition, the Polish Commercial Banks' Protection System (System Ochrony Banków

Komercyjnych, ‘SOBK'), comprising the eight largest commercial banks active on the

Polish market, was created and decided, on a voluntary basis, to (i) support the operation

with approximately EUR 735 million (PLN 3.5 bn) to absorb further losses; and (ii)

temporarily purchase a 49% share in the bridge bank

322

. In this particular case, the

balance sheet structure of the bank was mainly funded by deposits

323

. Instead of

liquidating the bank and paying out covered depositors, authorities decided to resolve the

bank (preparing for future sale and exit from the market). Meeting the conditions (i.e.

minimum 8% TLOF bail-in) for accessing resolution funding would have implied

compromising the integrity of its deposits book and imposing losses on depositors. This

situation is likely to have motivated the decision of other commercial banks in Poland to

voluntarily intervene and contribute to the resolution cost (complementing DGS support)

and, in that way, avoid risks of widespread contagion in the national financial market that

could have stemmed from the bailing-in of (some) deposits in Getin Noble Bank S.A.

This multi-layered funding arrangement illustrates the weakness of the current

framework, in particular, the difficulties encountered by certain banks in meeting access

conditions for resolution funding and the importance of exploiting synergies between

DGSs and RFs

324

In what concerns the general depositor preference, consultations with stakeholders

confirmed that the bail-in of any deposits is deemed to carry a significant contagion risk

to the financial system and to entail political sensitivities, so much so that, despite only

covered deposits being in the list of mandatory exclusions from bail-in in Article 44(2)

Source: European Commission’s press release (01 October 2022)

State aid: Commission approves aid

to support the resolution of the Polish Getin Noble Bank S.A.

323

Source: BGF (3 October 2022) –

Resolution of Getin Noble Bank SA.

324

Relates to problem 2 and its first driver addressed in this impact assessment (Chapter 2, section 2.2.1)

and in section 7.1.2.3 of the evaluation.

322

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BRRD, resolution authorities generally expect to have to exclude (all) other deposits on a

discretionary basis from bearing losses in resolution under Article 44(3) BRRD. When

some of those deposits rank

pari passu

with senior bail-inable liabilities, their exclusion

has the potential to create NCWO

325

problems, particularly considering that they tend to

represent a significant percentage of the total senior class.

326

Besides the challenges described above in meeting the minimum 8% TLOF

327

condition

to access resolution funding, the 5% TLOF cap on the usage of such funding

328

may also

be problematic for certain banks, in particular when it results in a small amount of

funding allowed to be used, which may not be deemed sufficient to ensure the execution

of the resolution strategy.

It is arguable that a proportionate approach to managing bank failures should ensure that

entities can access funding sources without having to structurally modify their business

model. The existence of a variety of business models is an important element to ensure a

diversified, dynamic and competitive banking market.

a) Divergent access requirements for the resolution fund and for funding outside

resolution

In two cases of banks for which a FOLF determination was issued by the competent

supervisory authority, there was no need to look into possible difficulties in accessing

resolution financing due to a negative PIA and the usage of tools outside resolution and,

inarguably, with more easily accessible sources of funding. In the Banking Union, in the

above-mentioned two cases where resolution was not deemed to be in the public interest,

banks benefited from public support under national insolvency proceedings (including

from the public budget). In other past interventions observed, national authorities granted

support to banks, which were rather close to a situation of failure, in the form of

preventive measures under Article 11(3) DGSD. Both the use of aid under national

insolvency proceedings and Article 11(3) DGSD are subject to different (and arguably

less-stringent) conditions than those for the use of the resolution funds under the SRMR

and BRRD leading to a disincentive to use resolution.

In particular, public support may be available outside resolution and accessible under

more advantageous conditions from the point of view of allocating losses to the bank’s

creditors. Some of these solutions are of preventive nature, and the lower burden sharing

is combined (and justified) by additional conditions ensuring that the bank is not FOLF.

First, public funds can be used to provide capital injections or liquidity support to banks

in a “precautionary” way, under specific circumstances, set out in the BRRD. The

relevant provisions (Article 32 BRRD) provide requirements and conditions to ensure

that the intervention is timely and precautionary in nature, in particular, that the support

is granted to a solvent bank whose financial condition has not deteriorated to a point of

325

Resolution authorities must ensure that the application of resolution tools would not make creditors

worse-off than they would have been in insolvency (“no creditor worse off” (NCWO) principle).

326

See also Annex 8 of the impact assessment.

327

As explained in sub-section (a), according to the informal interpretation of the Commission’s services of

the relevant legal provisions in the BRRD/SRMR, the use of the RF/SRF for the provision of liquidity in

resolution is not subject to the 8% minimum bail-in requirement.

328

The cap could be exceeded under condition that all unsecured, non-preferred liabilities, other than

eligible deposits, have been written down or converted in full (Article 44(7)(b)).

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failure and that the aid is minimised. Second, DGS funding of measures, pursuant to

Article 11(3) DGSD which can be used to prevent the bank’s failure (preventive

measures) may also qualify, as State aid or not, depending on the circumstances of the

case.

329

Also, in this case, conditions exist to ensure that the support is granted as a

preventive measure to a non-FOLF bank. As outlined in Chapter 2 of the impact

assessment, the functioning of these measures in line with the logic of resolution is

dependent on these conditions being clear and correctly applied.

In addition to these precautionary and preventive measures, funding of the failure of a

bank through public budgets is possible, in insolvency proceedings, when the PIA is

negative (liquidation aid). Alternative measures financed by the DGS in insolvency

proceedings may also be subjected to the State aid conditionality for liquidation aid, on a

case-by-case basis.

Compared to the 8% TLOF bail-in requirement to access resolution funding, which could

entail bailing-in senior unsecured creditors, including non-preferred, non-covered

deposits

330

, access conditions under the State aid rules (mainly governed by the

Commission’s 2013 Banking Communication

331

) require adequate burden-sharing

entailing, after losses are first absorbed by equity, contributions by hybrid capital holders

and subordinated debt holders, which may be less demanding. The fact that external

financing outside resolution could be easier to access and could be provided with fewer

limitations for the bank’s creditors, than financing arrangements in resolution, creates

room for arbitrage and may incentivise resolution authorities to look for solutions outside

the resolution framework. This effect is exacerbated by the fact that, in applying the PIA

so far, resolution authorities have not in all cases taken into consideration the possibility

of granting aid in insolvency (which would matter from the perspective of ensuring the

minimisation in the use of extraordinary financial support, see

Section 7.1.3.4

for more

details).

Box 9: Divergences in conditions to access funding for resolution fund and for

funding outside resolution under the State aid framework

Access conditions to resolution funding

The BRRD (recital 73, Article 44(5) and 37(10)) stipulates that, when discretionary

exclusions to bail-in are applied in connection with certain creditors (e.g. on grounds of

protecting financial stability or because such creditors would be difficult to bail-in within

a reasonable timeframe), and where the losses cannot be passed to other creditors, the

resolution financing arrangement may make a contribution to the institution under

resolution subject to a number of strict conditions. These conditions include the

requirement that losses totalling not less than 8% of total liabilities including own funds

(TLOF) have already been absorbed, and the funding provided by the resolution fund is

limited to the lower of 5% of TLOF or the means available to the resolution fund and the

329

330

See sub-section (c) for more details on the alternative and preventive measures under DGSD.

See Annex 7 on the impact of bail-in on uncovered (and in some cases covered) deposits under different

scenarios.

331

European Commission (2013),

Banking Communication.

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amount that can be raised through ex post contributions within three years. In accordance

with the changes introduced in Article 59 BRRD by the 2019 Banking Package, the

amount by which CET1 items are reduced to absorb losses as identified in the valuation

carried out under Article 36, including the valuation for the purposes of assessing

whether the conditions for resolution are met, count towards the 8% of TLOF threshold.

Access conditions under State aid rules

The 2013 Banking Communication (paragraphs 40-42) sets out the minimum burden-

sharing requirement that would, provided that other considerations are also met, enable

the granting of aid. To reduce the moral hazard that State aid could cause, aid should

only be granted on terms which involve adequate burden-sharing by existing investors.

Adequate burden-sharing will normally entail, after losses are first absorbed by equity,

contributions by hybrid capital holders and subordinated debt holders. Hybrid capital and

subordinated debt holders must contribute to reducing the capital shortfall to the

maximum extent. Such contributions can take the form of either a conversion into

Common Equity Tier 1 or a write-down of the principal of the instruments. The State aid

rules do not require contribution from senior debt holders (in particular from insured

deposits, uninsured deposits, bonds and all other senior debt) as a mandatory component

of burden- sharing whether by conversion into capital or by write-down of the

instruments.

For a significant number of banks in the EU, bailing-in 8% TLOF to access resolution

funding would also entail bailing-in senior unsecured creditors, including non-preferred,

non-covered deposits. This concludes that the access conditions are stricter in resolution

than under the State aid rules. The design and interaction between funding solutions in

and outside the framework play a central role in the shaping of incentives to apply the

CMDI framework.

The divergences mentioned above can 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, creates a need to reconsider

whether the framework can be improved to achieve its objectives with more clarity and

predictability. This would in turn promote a more consistent approach to the management

of bank failures, including in terms of increased level playing field at EU level.

DGS funding in resolution and 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 intervention. The DGS

support in resolution is established, in principle, to an amount equal to the losses borne

by covered deposits if they were exposed to bail-in or 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 under an insolvency counterfactual

332

. This provision has not

332

Based on the so-called least cost test.

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been used, so far, in practice. The difficulties in providing funding in resolution from the

DGS relate to certain other conditions set out in Article 109 BRRD.

Particularly, conditions under paragraphs (1)(a) and (b) are restrictive and difficult to

operationalise, particularly the limitation that the DGS is liable for the losses that covered

deposits would have suffered had they been bailed-in at the same time as creditors with

the same ranking. Considering that covered deposits benefit from super-preference in the

ranking of claims and that the value of assets in resolution is in principle higher than in

insolvency, in most cases covered deposits would not have been called upon to bear

losses in resolution to enable the DGS to step in. Additionally, this provision introduces

limitations on the maximum amount of the DGS contribution, which may not exceed the

losses that the DGS would have borne in an insolvency counterfactual nor 50% of its

target level.

In order to operationalise the application of the provision, and to preserve its

effet utile

the Commission services support the interpretation

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that under Article 109 BRRD, DGS

funds may be used to support the transfer of eligible deposits in resolution provided that

such contribution is instrumental to ensuring access of depositors to their covered

deposits. In particular, DGS funds may be used to inject an amount equal to the

difference between eligible deposits and assets, provided that the “least cost” principle is

respected (i.e. provided that the costs borne by the DGS do not exceed the net amount of

compensating covered depositors at the credit institution concerned, in the context of

national insolvency proceedings.) Notwithstanding this interpretation, it is appropriate to

consider revising the wording of the provision to clarify the reading of the provision in

line with the approach mentioned here.

As mentioned in sub-section (b) funding sources from the DGS are also available for

banks that do not meet the PIA and are put in insolvency according to the applicable

national law (alternative measures). The DGS can provide funding to support a transfer

transaction to the extent that this is necessary to preserve access to covered deposits and

that it complies with the least cost test (LCT) and State aid rules, as applicable. The LCT

requires that the loss for the DGS is lower than the loss it would have borne in case of

payout in insolvency, while the qualification of the DGS use as State aid would entail a

minimum burden sharing by shareholders, hybrid capital holders and subordinated

debtholders, for its authorisation. Also in this case, the DGS’ super preference creates a

substantial limitation to the possibility for the DGS to provide funding.

The access conditions to DGS funding in resolution and insolvency are not aligned,

which makes the use of funds subject to uncertainty. Finally, the opportunity to use DGS

funding in resolution or insolvency entails different arbitrage 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 the combination of the funds. In the case of

Banking Union Member States, the SRF is financed by all banks in the Banking Union

while the financing of DGS is national, creating an “asymmetry” in the burden of the

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This interpretation has not been formally adopted yet by the Commission.

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costs in case DGS would “substitute” resolution funds. Moreover, in the absence of EDIS

there may be a risk of a shortfall in DGS funds.

It is important therefore to review the access conditions for DGS funding in resolution

and insolvency to ensure level playing field, consistency and proportionality between the

applications of procedures.

7.1.3. Objective (3): Did the framework achieve the objective of enhancing the

functioning of the single market including by handling of cross-border

crises and fostering level playing field among banks from different Member

States, particularly in the Banking Union?

Many aspects of the CMDI framework improved the functioning of the single market in

banking and the level playing field among banks. The framework created a centralised

mechanism and governance for resolution (SRM) in the Banking Union, cross-border

coordination processes as well as tools and cooperation requirements (e.g. creation of

resolution groups and internal loss absorbing capacity for subsidiaries in host Member

States) to handle the failure of cross-border banking groups.

Cross-border coordination among national DGSs was enhanced by the DGSD, which also

facilitated access to the internal market through the freedom of establishment and the

freedom to provide financial services while increasing the stability of the banking system

and the protection of depositors.

Yet, despite these achievements, the operational handling of recent bank failures in some

Member States, was characterised by a lack of consistency and uneven playing field. This

was mainly caused by broad discretion in the conditions for the application of the

BRRD/SRMR measures, which leaves room for arbitrage in the decision of the public

authorities to resort to resolution or insolvency tools, depending on the solutions available

for a specific failing bank. This arbitrage is fuelled by several factors, the most important

being (i) divergent access conditions for the resolution funds and for funding outside

resolution and difficulties for certain banks in accessing resolution funds (see Section

7.1.2.3), (ii) differences in the track record between resolution authorities to make use of

industry-funded resolution funds and (iii) the availability of various national tools which

may be similar to resolution tools, with often heterogeneous and unclear activation

conditions.

The divergent application of rules, lack of harmonised hierarchies of claims and the

uneven playing field for banks, depositors and taxpayers emerging as a consequence of

these issues, among other elements, also contribute to market fragmentation in the EU,

reducing the level of cross-border market integration and the functioning of the single

market in banking. While the reduced incentives for cross-border market consolidation

through mergers and the more reduced volume of cross-border banking transactions

cannot be entirely linked with the application of the CMDI framework, the resolution

regime does have a bearing on it and its improvement would be conducive to more

market integration in the medium and long run.

The DGSD’s contribution to EU level playing field could also be further improved, in

particular with regard to ONDs and their potential impact on the internal market.

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Moreover, the differences in robustness and firepower among national DGSs combined

with the lack of EDIS in the Banking Union may further exacerbate the uneven playing

field, especially if a large shock event were to materialise in one of the participating

Member States.

Overall, evidence from the application of the framework points out to the achievement of

a sub-optimal functioning of the single market and the need for significant improvements

to remove differences in treatment among banks, creditors, depositors and taxpayers in

different Member States.

Main factors influencing the objective’s achievement

Factors influencing performance against Overall impact on objective

objective

1) Centralised governance in the Banking Union

Positive

(creation of SRM, SRB, SRF)

2) Supervisory cooperation and EU oversight on

Positive

(enhanced

cross-border

convergence of supervisory practices

cooperation, EU resolution colleges, EBA’s

convergence mandate, positive impact on

market integration)

3) Precautionary and preventive measures

Negative

(lack of clarity and framing of

precautionary and preventive measures,

divergent

access

requirements

resolution)

4) Predictability of legal framework and the

Negative

(lack of predictability of

approach to PIA

application, restrictive approach and across

EU, divergent application of PIA,

conducive to market fragmentation).

5) Interaction between national insolvency

Negative

(lack

of legal certainty due to

proceedings and resolution triggers

divergent triggers, legal limbo situations)

National ranking of claims in insolvency

Negative

(unharmonised)

7.1.3.1. Centralised governance in the Banking Union

One of the most important achievements of the framework with respect to the single

market functioning was the creation of the Single Resolution Mechanism (SRM), the

second pillar of the Banking Union. The centralised decision making is built around the

Single Resolution Board (SRB) consisting of a Chair, a Vice Chair, four permanent

members, and the relevant national resolution authorities

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. The SRB is directly

responsible for the resolution of the entities and groups directly supervised by the

European Central Bank (ECB) as well as other less significant cross-border groups. The

functioning of the SRM is enabled, among other factors, by its governance, in particular,

the strong cooperation and coordination between the SRB and national resolution

authorities via its Plenary Session

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, various task force groups, forums and committees.

334

335

Composition of the Governing Body of the SRB in its extended Executive Session.

In the Plenary Session of the SRB, all of the NRAs are represented, together with the SRB Chair and the

four permanent Board Members.

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This centralised decision-making system for the Banking Union contributed significantly

to the functioning of the single market in banking and to fostering consistent policies and

approaches, mainly in cases of cross-border resolution preparedness (and to, a lesser

extent, in terms of resolution execution).

7.1.3.2. Supervisory cooperation and EU oversight on convergence of

supervisory practices

The CMDI rules create a framework for coordination and communication processes,

exchange of information, as well as tools for competent and resolution authorities from

different Member States to cooperate and communicate effectively on crisis preparedness

and execution for cross-border banking groups. The legislation provides joint decision-

making processes for critical elements such as: the preparation of group recovery and

resolution plans, removal of impediments to group resolvability and setting up resolution

buffers (MREL).

Furthermore, the BRRD requires the creation of EU resolution colleges as a forum for the

group‐level resolution authorities, other relevant resolution authorities, supervisory

authorities, competent ministries and authorities responsible for DGS, to collectively plan

for and coordinate the resolution of cross-border banking groups

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. The BRRD also

provides the rules for communication and exchange of information between EU and third

country resolution authorities and other international institutions.

In this context, the EBA is mandated by the framework to develop a wide range of

technical standards, guidelines and reports with the aim of ensuring effective and

consistent procedures across the Union, in particular with respect to cross-border

financial institutions. To fulfil the EBA’s role in ensuring EU convergence in the

application of the rules, national authorities must notify the EBA of any relevant

information as well as of any actions taken under the framework. The EBA publishes

non-confidential elements of these notifications on its website together with its

assessment of the supervisory convergence, including in the continuum between ongoing

supervision, recovery and resolution.

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The creation of these effective cooperation and coordination arrangements and of a

centralised oversight of convergence of supervisory practices helped with tackling

challenges of cross-border banks vulnerabilities and failures and creating a level playing

field in the single market for EU banking products.

7.1.3.3. Precautionary and preventive measures

Precautionary measures allow the provision of extraordinary financial support from

public resources to a solvent bank, to diffuse the risks of a serious disturbance in the

economy of a Member State and to preserve its financial stability.

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The available

measures comprise capital injections (precautionary recapitalisation) as well as liquidity

support. Possible uses of precautionary recapitalisation also include relief measures

336

337

Third country authorities may also be invited to attend colleges as observers.

EBA (14 March 2019),

EBA notes good progress in convergence of supervisory practices across the

EU.

338

These measures are provided in Article 32(4)(d) BRRD.

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through the transfer of impaired assets

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, and similar considerations have been extended

to asset protection schemes

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. The provision of such support is an exception to the

general principle that the recourse to extraordinary public financial support to maintain

the viability, solvency or liquidity of a bank should lead to the determination that the

bank is FOLF. For this reason, specific requirements must be met in order to allow such

measures under the BRRD/SRMR

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as well as under the State aid rules for banks

342

Notwithstanding the correct application of these safeguards in past practice, it also

occurred that two banks benefitted from multiple public supports in the form of

precautionary liquidity on grounds,

inter alia,

of being declared solvent by the competent

supervisor, only months before being assessed as FOLF. Based on this experience,

practices of the Commission and authorities involved in such situations were already

enhanced. For precautionary recapitalisation, the rules should take stock of the adjusted

approach developed based on past experience (see Annex 9 of the impact assessment), to

enforce the very stringent conditions already established, which are key to ensure that aid

in this form can be granted without impinging on the overarching objective of avoiding

moral hazard. Nonetheless, there is scope to improve the clarity of the relevant legal

provisions and to ensure the predictability and consistency of the outcome going forward.

In certain circumstances, DGS funds can be used to prevent the failure of a bank

(preventive measures under Article 11(3) DGSD) and be very useful in averting further

financial deterioration, which could lead to a crisis. Currently, the legal provisions

enabling the use of DGS funds for such preventive measures are optional and not all

Member States have transposed them into national law. Only nine Member States

(Austria, Croatia, France, Germany, Ireland, Italy, Malta, Poland and Spain) have

transposed this option in national law

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Such measures are possible only if not qualified as State aid. Depending on several

elements, the DGS intervention could be qualified as 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 the circumstances relating to the measure. It is therefore hard

to predict whether the intervention would qualify as State aid or not. However, this

qualification has an impact on the legal treatment of the DGS intervention. 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

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The necessary conditions to allow the use of precautionary recapitalisation to support an impaired asset

relief measure are outlined in detail in the Commission Asset Management Companies blueprint, page 36,

see European Commission staff working document (March 2018),

AMC Blueprint.

340

European Commission (16 December 2020),

Communication from the Commission to the European

Parliament, the Council and the European Central Bank: Tackling non-performing loans in the aftermath

of the COVID-19 pandemic (COM(2020) 822 final,

p. 16).

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In particular, BRRD and SRMR require that the measure is limited to solvent banks and it does not

cover incurred and likely losses. Also, the amount is limited to the shortfall identified in an asset quality

review, stress test or equivalent exercise.

342

Out of which rules, the most relevant for the purpose of this impact assessment, is the 2013 Banking

Communication, see European Commission (2013),

Banking Communication.

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Source: CEPS study, p. 124.

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the BRRD

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. Available evidence shows that some preventive measures were assessed as

being private or in line with market conditions (i.e. EUR 5.92bn funded by private arm of

DGS fund or market-conform public measures) and therefore not qualified as State aid

(see Annex 9).

Moreover, the conditions for application of DGSD preventive measures should be clear,

harmonised, and consistent with other elements of the framework (e.g. FOLF criteria),

while safeguards should be applied to ensure that such interventions are sufficiently

sound from a financial perspective and would not impinge excessively on the DGS’

resources. However, the current legislative text does not provide adequate clarity on such

safeguards and conditions

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. In past interventions observed, national authorities granted

support to banks, which were rather close to a situation of failure. 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 in presence of a deterioration of the bank’s financial condition but

still far from a condition of failure. The interactions between preventive, precautionary

tools, early intervention measures and the timing and process of the FOLF determination

(laid down in Article 32 BRRD) are also unclear, which may lead to overly extensive use

of public/RF/DGS funds. In particular, the framework, gives the supervisor, significant

discretion for determining solvency, capital requirements, FOLF, as well as for the

timeframe handed to the bank for averting its failure (e.g. through a private solution or

early intervention measure). All these discretions interact with the conditions for the use

of preventive and precautionary tools. As mentioned above, this ambiguity led to

situations where banks received State aid in the form of precautionary liquidity on

grounds, inter alia, of being declared solvent, by the competent supervisor, only months

before being assessed as FOLF, as the banks’ solvency was assessed on the basis of a

point-in time (thus not forward looking) definition.

For both, DGSD preventive measures and BRRD precautionary measures, amendments

improving the clarity of the relevant legal provisions would help limiting the risk that

preventive support would allow existing senior 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).

Box 10: Example of unclear interaction between precautionary measures and FOLF

determination – Case of the Venetian banks

In January 2017, two mid-sized Italian banks, Banca Popolare di Vicenza and Veneto

Banca (the “Venetian banks”), benefited from precautionary liquidity support, on

grounds, inter alia, of the bank being declared solvent by the supervisor, amounting to

EUR 6.5 bn, which was supplemented in April 2017 by another EUR 3.6 bn. The total

amount of the precautionary liquidity measures represented 16% of the banks’ combined

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That is because according to Article 32(4)(d) BRRD the use extraordinary public financial support

(State aid), except in limited exceptions (such as in the case of precautionary measures) is one of the

criteria for FOLF determination and hence may lead to the resolution or insolvency of the bank.

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