The Council today agreed on a negotiating mandate on the review of the crisis management and deposit insurance (CMDI) framework for banks. The review includes a comprehensive set of measures designed to strengthen the existing EU crisis management framework, and in particular to improve the resolution process for small and medium-sized banks. It also constitutes an immediate step towards the further completion of the Banking Union, as agreed by the Eurogroup in June 2022. “With this mandate, we are taking a significant step towards a more integrated and effective crisis management framework that will reinforce our ability to address the challenges posed by the resolution of small and medium-size banks. The revised CMDI framework will bring significant benefits in terms of strengthened financial stability, better protection of deposits and taxpayers’ money, and a level playing field between smaller and larger banks in the EU, all of which are key to the deepening of the Banking Union. This constitutes an important success for the Belgian Presidency, on a complicated and politically sensitive file. ” — Vincent Van Peteghem, Belgian minister of finance With this agreement, the Council is ready to engage in negotiations with the European Parliament on the final shape of the legislation. Public interest assessmentA resolution procedure can only be initiated if it is considered to be in the public interest. The CMDI framework clarifies how the public interest assessment is to be conducted by resolution authorities. In particular, the reform aims to extend the scope of resolution to some small and medium-sized banks by broadening this public interest criterion. To reach this objective, the Council clarifies in its mandate that the public interest assessment should be conducted in two stages. First, the resolution authority must determine whether any of the resolution objectives would be threatened in case of insolvency. If this is the case, a normal insolvency procedure should only be possible if it achieves the resolution objectives more effectively than a resolution procedure. If a normal insolvency procedure is not more efficient, a resolution procedure must be initiated. Finally, the Council mandate also provides that when assessing disruptions of the real economy, the resolution authority should focus on both the national and regional levels, reflecting the potential footprint of some small and medium-sized banks. ‘Bridging the gap’One of the main objectives of the CMDI reform is to facilitate the resolution of failing banks in the EU, thereby minimising contagion risks or spillovers to the real economy. The review of the CMDI framework aims to make the framework more robust and more credible, in particular by addressing certain funding issues potentially faced by some small and medium-size banks in resolution. The first line of defence in resolution remains the minimum requirement for own funds and eligible liabilities (‘MREL’) that banks are required to maintain to ensure that their losses are absorbed and their recapitalisation needs are first provided by their own shareholders and creditors. Yet, the CMDI framework aims to facilitate the recourse to industry-funded safety nets (namely the national Deposit Guarantee Schemes or (DGSs) together with, in the Banking Union, the Single Resolution Fund or (SRF), or national resolution funds outside the Banking Union) as an additional source of funding to finance transfer strategies in resolution proceedings leading to a market exit. This is referred to as using DGS funds to 'bridge the gap' allowing to subsequently unlock an intervention of the SRF. Compared to the Commission proposal on bridging the gap, the Council’s mandate provides: - additional safeguards on the use of DGS or SRF funds to avoid unintended consequences or moral hazard, ensuring in particular that bridging the gap does not replace loss absorption by the failing bank's shareholders and creditors
- an adequate burden sharing between the DGS and the SRF, where the latter is tapped within the Banking Union, subjecting their interventions to limits and to a ‘pecking order’, in particular giving the SRF priority for repayment purposes
- stricter requirements and limitations on the use of bridging the gap for banks with a balance sheet size between € 30 billion and 80 billion, which will furthermore only be available during the 10-year period after the entry into force of CMDI
Hierarchy of claimsThe Council’s mandate maintains the principle that deposits should benefit from a general preference, increasing the protection from which all depositors benefit in insolvency ranking. However, it removes the Commission’s proposed ‘equal ranking’ that would give all depositors the same preferred ranking in a bank insolvency. It reintroduces a ‘super-preference status’ for DGS-protected depositors and, by extension, to the DGS in the event of subrogation. At the same time, as the reintroduction of the super preference of the DGS limits their possibility to intervene in resolution, the Council agreed to harmonise and broaden the 'least cost test'. This broadened test will have to be carried out before the resources of the DGS can be used outside a pure payout in insolvency, meaning to finance preventive measures before a bank is resolved, alternative measures in support of a liquidation or to support a resolution procedure. It ensures that any use of DGS funds cannot exceed the hypothetical cost of reimbursing covered depositors in the event of liquidation, subject to certain adjustments that factor in indirect costs and to an 85% correction factor. Preventive and alternative measures In its mandate, the Council clarifies the distinction between preventive measures to prevent a bank’s failure and alternative measures. It revises the process flow for preventive measures clarifying the involvement of each authority. In accordance with the Eurogroup statement of June 2022, the Council mandate also introduces specific provisions to preserve a functioning framework for institutional protection schemes (“IPSs”) to implement preventive measures. Extraordinary public financial support The Council’s mandate clarifies what forms of public financial support for failing banks would be permissible in extraordinary circumstances and provides for a workable process for their application. SRB governanceThe Council’s mandate confirms the role of the executive session of the Single Resolution Board (‘SRB’) in the adoption of SRB’s legal instruments setting out resolution practices and resolution planning methodologies and clarifies the role of its plenary session in this process. Here, the objective is to promote an inclusive Single Resolution Mechanism, recognising that national resolution authorities may have legitimate concerns when resolution practices and methodologies are established by the SRB. Next stepsThe European Parliament adopted its position in first reading on 24 April 2024. Today’s agreement paves the way to interinstitutional negotiations in view of reaching an agreement in early second reading. Once an agreement is reached, it would have to be formally adopted before becoming law. BackgroundOn 18 April, the Commission adopted the set of legislative proposals to review the crisis management and deposit insurance (CMDI) framework. The review is composed of: - a proposal for a directive amending the bank recovery and resolution directive
- a proposal for a directive amending the deposit guarantee schemes directive
- a proposal for a regulation on a proposal for a the single resolution mechanism regulation
- targeted amendments to the daisy chain act
The targeted amendments to the daisy chain act were adopted on 26 March 2024. | 
