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"CMDI will enhance the EU crisis management framework if its tools are effective" - Eurofi article by Dominique Laboureix

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In 2022, the Eurogroup agreed on a number of elements to strengthen our crisis management framework. One of these elements was a “broadened application of resolution tools in crisis management at European and national level, including for smaller and medium-sized banks, where the funding needed for effective use of resolution tools is available, notably through MREL and industry-funded safety nets.”[1] The rationale was to spare taxpayers from having to shoulder the consequences of these smaller banks' crises, as it has happened in the past.

The 2023 Commission’s Crisis Management and Deposit Insurance proposal (CMDI) pointed exactly in that direction. More small banks would be earmarked for resolution. Resolution authorities, in turn, would have additional easy-to-use tools to deal with the potential failure of those banks.

Resolution has a number of advantages over liquidation. First, in resolution, the use of taxpayers’ money is explicitly ruled out. Also,  when a failing bank reopens after the resolution weekend, customers keep access to its full range of services. This is not necessarily the case in liquidation.

This does not mean that all banks running into trouble should be resolved. Even after CMDI, liquidation will stay relevant for most banks. The Banking Union is home to around 2 000 small banks and, even after CMDI, for the most part, liquidation will remain the preferred approach in case of crisis. So, resolution will not be the general solution.

With CMDI, banks entering in the scope of resolution, even the smaller ones, would have to respect the same standards as their larger peers, in a proportionate way - ensuring a level playing field. This means, among other things, that these banks would have to build and maintain their minimum requirement for own funds and eligible liabilities (MREL), like their larger peers.

At the same time, resolution authorities would need a more flexible toolset to deal with the resolution of these smaller banks. This is why the Commission introduced an alternative way of funding a market exit for the bank in crisis, if it is in the public interest and after the depletion of the MREL resources of the bank. To do so, CMDI makes the use of Deposit Guarantee Scheme funds more realistic (through the so-called “DGS bridge”), and facilitates the use of the Single Resolution Fund. This funding would help the sale of the ailing bank to a solid acquirer. By doing so, CMDI enhances flexibility, preventing the risk of unsuccessful resolution decisions.

Nevertheless, MREL will remain the first line of defence. In that sense, after the introduction of CMDI, shareholders and (MREL) creditors will clearly shoulder the burden of resolution in all banks earmarked for resolution, big or small. If anything, by enlarging the scope of resolution and leaving the MREL requirements unchanged, CMDI would increase the aggregate amount of MREL in the system.

At the same time, through the DGS bridge, CMDI would give resolution authorities the flexibility to deal with smaller banks at a limited cost for the industry[2].  

Some stakeholders worry that this proposal could create bad incentives for smaller banks by simplifying the use of DGS funds or the SRF for their resolution. This is not the case. CMDI doesn't change neither the resolvability expectations, nor the loss order: shareholders are first to bear losses, then MREL-eligible instrument holders, and only then, when and where necessary, DGS and the SRF - to finalise the sale of business.

After the reviews of Council and Parliament, the CMDI proposal now seems less ambitious. In particular, the Council’s text introduces 19 new safeguards restricting access to the new funding – a key element for a successful resolution. Whatever compromise legislators may find in trilogue on the sensitive issues around the DGS bridge, they should make sure it delivers in terms of funding available for a resolution decision. Without proper funding, liquidation and bailouts may become the only option.

The SRB will implement the final package agreed by the colegislators, whatever its content. Nevertheless, it should be clear that, if the funding provided is too limited or its safeguards too complex to satisfy during a resolution weekend, the reform's impact on financial stability and taxpayer protection may be limited. Everyone, including banks, will benefit from a more effective crisis management framework. CMDI, in the path charted by the Eurogroup, is crucial for delivering on this objective and will have a positive impact for achieving a fully-fledged Banking Union.


[1] Eurogroup statement on the future of the Banking Union of 16 June 2022

[2] Single Resolution Board, "The Commission proposal to reform the EU Bank Crisis Management Framework: A selected Analysis", December 2023

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