New EU Banking Crisis Rules

In a pivotal move aimed at enhancing the management of banking crises within the European Union, new regulations have been definitively adopted by the European Parliament. These rules, designed to safeguard taxpayers and depositors, will notably shift the financial burden of bank failures primarily onto shareholders, creditors, and industry-funded financial instruments.

The recent legislative development expands the scope of EU rules governing banking crises, thereby strengthening the protection of taxpayer money. It also allows authorities to manage bank failures more effectively and harmonizes depositor protection across the EU. The adoption took place via announcement, without a vote, due to the absence of amendments, highlighting a consensus on the urgency of these measures.

Under the new regulations, Deposit Guarantee Schemes (DGS), funded by the sector and covering up to €100,000, will receive the highest priority in reimbursements in insolvency or resolution scenarios. This is followed by retail depositors and SMEs, and then by smaller public authorities, provided they are not professional investors. Additionally, certain real estate-related deposits will now be covered from €500,000 up to €2,500,000, depending on the case.

The resolution framework, which allows for the restructuring or liquidation of a failing bank while safeguarding financial stability and protecting depositors, will also extend to smaller and medium-sized banks if it serves the public interest. To access external funds, shareholders and creditors of failing banks must first absorb losses amounting to at least 8% of the total liabilities and own funds (TLOF). A “bridge the gap” mechanism will enable deposit guarantee funds to help meet this threshold, facilitating an orderly market exit.

This legislative package includes three acts: the Bank Recovery and Resolution Directive (BRRD), the Single Resolution Mechanism Regulation (SRMR), and the Deposit Guarantee Schemes Directive (DGSD). The new rules will come into effect on the twentieth day following their publication in the Official Journal of the EU and will apply, with some exceptions, after 24 months.

This reform underscores the EU’s commitment to enhancing and harmonizing the framework for managing banking crises, ensuring a more integrated European banking sector and advancing towards the completion of the banking union.