By Pauline Lambert, Executive Director, Financial Institutions

However, it remains to be seen if harmonising national deposit guarantee schemes (DGS) will be sufficient or whether mutualisation at EU level through EDIS, the missing third pillar of the Banking Union, will be politically acceptable across all member states. At the same time, the speed of deposit withdrawals witnessed during the market turmoil of March 2023 should have encouraged further discussions on the merits of EDIS.

Other initiatives to improve the process for dealing with failing banks, all proposed as amendments to the Crisis Management and Deposit Insurance (CMDI) framework, include:

• Early intervention measures to stop a bank’s position from deteriorating;
• Expanding the public-interest assessment to consider disruption at regional level and not just nationally as is currently the case; and
• Raising the threshold for determining that resolution is not in the public interest, with insolvency being the preferred option only if it achieves resolution objectives more effectively and not only to the same extent as resolution.

If adopted, the amendments would likely result in more small and medium-sized banks being subject to resolution strategies, and thus resolution planning and MREL requirements. These changes would reinforce the trend of more and more EU banks being subject to resolution procedures. In the year to May 2024, the number of banks with external MREL decisions increased to 352 from 309, according to the EBA, driven by small banks moving to resolution strategies from liquidation.

Giving deposits a general preference in insolvency hence subordinating senior unsecured debt would harmonise the ranking of deposits across the EU. Currently, only nine member states have full depositor preference: Bulgaria, Croatia, Cyprus, Greece, Hungary, Italy, Poland, Portugal, and Slovenia.

The clear separation of senior unsecured debt from deposits in the creditor hierarchy would also make it easier to bail-in senior unsecured creditors. Consequently, banks may not need the same level of subordinated MREL. In some countries with full depositor preference, such as Greece and Portugal, banks are not subject to subordinated MREL targets. More broadly, this change would prompt banks to evaluate their liability structures and funding profiles, in light of funding costs and, potentially, credit rating considerations.

Contrary to the European Commission’s proposal to reduce the three tiers of depositor preference to a single tier, both the Parliament and the Council support having multiple tiers of depositor preference. The Council supports a two-tier approach and has proposed that DGS and covered deposits have ‘super-preference’ status in the creditor hierarchy.

The Parliament’s proposal for general depositor preference contains four tiers, with covered deposits and uncovered deposits from individuals and small and medium-sized enterprises ranking higher than those from large companies and public authorities.

Figure 1: Move towards depositor preference

Source: European Commission, Parliament, Council, Scope Ratings

Article 108(1) of the Bank Recovery and Resolution Directive creates three levels of deposit seniority in insolvency. DGS funds and covered deposits have the same and highest seniority rank. Eligible but uncovered deposits (from individuals and micro, small and medium-sized enterprises that exceed the coverage level) hold the second highest seniority ranking. Lastly, the ranking of other deposits (uncovered corporate deposits and excluded deposits from financial firms and other authorities) is determined by member states.

The Commission, the Parliament and the Council are currently in trilogue discussions to agree the amendments. Given the way the legislative process works, the earliest any new rules in this regard would apply would be in 2026.

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