CMDI reform: the SRB view
The EU has put in place robust rules for bank supervision and crisis management, including a strong resolution framework. We’ve seen these pay off, in terms of how the European banking sector has coped with a series of crises. The rules also ensured the successful resolutions of Banco Popular in 2017 and the Sberbank group in 2022.
However, experience has shown that there is room for improvement in the overall crisis management framework, and the European Commission has brought forward a set of proposals, known as the Crisis Management and Deposit Insurance (CMDI review), following an agreement by the Eurogroup last year. The core of the reform aims to ensure that the resolution toolkit can be applied to any bank, regardless of size or business model, enabling its orderly exit from the market, where this is needed to preserve financial stability, protect taxpayers’ money and shield the real economy.
In a nutshell, the CMDI review increases the options and tools available to supervisors and resolution authorities for the management of a banking crisis and provides a pragmatic and efficient solution for the problem of small and mid-sized banks.
Traditionally, these banks are funded by equity and deposits and have limited access to capital markets, which prevents them from issuing loss-absorbing instruments in a sustainable way. When this type of bank has failed in the past, authorities have found solutions outside the harmonised framework, supported by public funds instead of the industry-funded safety nets that have been built up.
To address this, the proposals provide more flexibility and optionality for authorities in the use of the safety nets - only when justified by the need to protect deposits from bearing losses - while putting in place appropriate safeguards that ensure that shareholders and creditors remain the first in line to absorb losses. A more pragmatic use of Deposit Guarantee Schemes (DGS) outside their traditional payout function proves sensible, given that in various instances even the failure of a small bank could deplete the available financial means of a DGS.
The European co-legislators have already started working on their respective positions. One of the aspects that has determined differences of views concerns the amendments to the public interest assessment (PIA) and the number of banks that would change strategy from liquidation to resolution in consequence of the review. The single-tier ranking and the improved possibilities to access the national resolution funds and the Single Resolution Fund (SRF) have also proved contentious, due to the potential increase of the contributions of these funds in a ‘post-CMDI’ resolution and the costs that the DGS would bear in insolvency.
These key areas were analysed in a recent SRB staff working paper by Biraschi, De Bosio, Langella, Mainieri, Mata Garcia and Orszaghova. The paper uses data for both significant and less significant institutions and makes plausible assumptions. Overall, the working paper shows that the CMDI proposals present a good balance between ensuring that banks can be resolved without use of public money and limiting the additional burden for industry-funded means.
The analysis shows that only a limited number of relevant banks currently earmarked for liquidation would likely change to resolution. It is important to underline that the proposals keep the PIA as a discretionary decision taken on a case-by-case basis by the resolution authorities and its intention is to envisage only a proportionate expansion of resolution when this may improve the harmonised management of failures of mid-sized banks. Some fine-tuning of the proposed changes to the PIA may be considered by co-legislators to address the concerns raised by various stakeholders, without changing the substance of the proposal.
The paper also highlights that the proposed changes in creditor hierarchy and the use of a DGS as a bridge where necessary after the use of MREL resources, would help banks slated for resolution to reach the minimum bail-in requirement to access the SRF without bailing-in deposits. This would be important in cases where the protection of deposits would be necessary to avoid financial stability and contagion effects.
According to the quantitative analysis, the CMDI proposals would not excessively weigh on industry-funded safety nets. On a similar note, only marginal increases are expected for the costs that the industry would bear following the liquidation of banks under national insolvency proceedings.
Alongside the core changes related to expanding the scope of resolution and funding, the Commission proposals make other important improvements to the CMDI framework. These include the harmonisation of the criteria for preventative and alternative measures, clarifications to the early intervention measures, improvements to exchanges of information between competent and resolution authorities, changes to make possible the withdrawal of the licence upon a bank’s failure, thus addressing potential ‘limbo’ situations.
To conclude, the SRB’s analysis and experience shows that the CMDI proposals are a clear improvement to our framework. As a resolution authority, it allows us to better protect depositors and taxpayers at the same time, as well as safeguarding financial stability.
 Restoy F., Vrbaski R., Walters R. (2020), Bank failure management in the European Banking Union: What’s wrong and how to fix it, FSI Occasional Papers, 15, pages 44-45.
 All Member States in the Banking Union have at least one less significant institution for which a depositor payout would deplete its DGS. See Eule, J., Kastelein, W., Sala, E. (2022), “Protecting depositors and saving money, Why deposit guarantee schemes in the EU should be able to support transfers of assets and liabilities when a bank fails”, ECB Occasional Paper Series No 308, October, page 14.
 As regards the European Parliament, see the draft reports of the Economic and Monetary Affairs Committee for BRRD (report), SRMR (report) and DGSD (report). The Council has started its negotiations in May.
 This is a situation where a bank is deemed to be failing or likely to fail but the public interest criterion is not met for its resolution. In such a case, the orderly exit from the market of that bank may be hampered where the conditions for its liquidation or for the withdrawal of the banking license are not met.
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About the author
Mr Sebastiano Laviola joined the SRB in 2019, taking charge of resolution strategy and cooperation. This brief covers a range of cross-cutting issues relating to the core resolution activities (policies, standards, methodologies, financial stability) as well as the interplay with relevant stakeholders (NRAs, ECB, EC, EBA). In that capacity, he chairs the SRB Committee on Resolution between the SRB and the NRAs.