In its session on 20 March, the European Parliament’s Committee on Economic and Monetary Affairs (ECON) voted in favour of a compromise on amendments to the Bank Recovery and Resolution Directive (BRRD), the Single Resolution Mechanism Regulation (SRMR) and the Deposit Guarantee Scheme Directive (DGSD), a proposal by the Commission known as the ‘Crisis Management and Deposit Insurance (CMDI) Package’. This compromise is expected to be submitted to the plenary in April and could still be approved by Parliament before the end of this parliamentary term.
The CMDI package contains measures aimed at improving the efficiency of the bank resolution process and harmonising the application of the framework across EU member states. Finance Watch, the pan-European NGO advocating to make finance serve society, welcomes some aspects of the package, such as the removal of the super-priority of Deposit Guarantee Scheme (DGS) claims in the insolvency hierarchy, and the maintenance of a two-tier depositor preference approach, but regrets the decision to take DGS contributions into account for the calculation of the 8% ‘burden sharing’ threshold. This means that the DGS funds can be used to cover losses of an ailing bank in case of a resolution.
Christian M. Stiefmueller, Senior Adviser at Finance Watch, said:
“This package finally renders the 8% ‘burden sharing’ rule a dead letter. Requiring banks to build up the necessary capital and debt capacity to absorb losses in case they have to be resolved, would have contributed to the overall stability of the sector. Instead, the way has now been paved for banks to fall back on the collective safety net of deposit insurance funds and resolution schemes. In the post-crisis effort to control moral hazard and align risk-taking with loss-absorption, this is a significant step backwards.”
The ‘burden sharing rule’ (Article 44(5) BRRD) requires banks in resolution to impose on its shareholders and creditors losses amounting to at least 8% of the balance sheet total before external funding may be obtained.
About Finance Watch
Finance Watch is an independently funded public interest association dedicated to making finance work for the good of society. Its mission is to strengthen the voice of society in the reform of financial regulation by conducting advocacy and presenting public interest arguments to lawmakers and the public. Finance Watch’s members include consumer groups, housing associations, trade unions, NGOs, financial experts, academics and other civil society groups that collectively represent a large number of European citizens. Finance Watch’s founding principles state that finance is essential for society in bringing capital to productive use in a transparent and sustainable manner, but that the legitimate pursuit of private interests by the financial industry should not be conducted to the detriment of society.
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