Explanatory Memorandum to COM(2023)226 - Amendment of Regulation (EU) No 806/2014 as regards early intervention measures, conditions for resolution and funding of resolution action - Main contents

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dossier	COM(2023)226 - Amendment of Regulation (EU) No 806/2014 as regards early intervention measures, conditions for resolution and funding of ...
source	COM(2023)226
date	18-04-2023

1. CONTEXT OF THE PROPOSAL

• Reasons for and objectives of the proposal

The proposed amendments to Directive 2014/59/EU ¹ (the Bank Recovery and Resolution Directive or BRRD) are part of the crisis management and deposit insurance (CMDI) legislative package that also includes amendments to Regulation (EU) No 806/2014 ² (the Single Resolution Mechanism Regulation or SRMR) and to Directive 2014/49/EU ³ (the Deposit Guarantee Schemes Directive or DGSD).

The EU crisis management framework is well-established, however, previous episodes of bank failures have shown that there is need for improvements. The aim of the CMDI reform is to build on the objectives of the crisis management framework and to ensure a more consistent approach to resolution, so that any bank in crisis can exit the market in an orderly manner, while preserving financial stability, taxpayer money and ensuring depositor confidence. In particular, the existing resolution framework for smaller and medium-sized banks needs to be strengthened with respect to its design, implementation and, most importantly, incentives for its application, so that it can be more credibly applied to those banks.

Context of the proposal

In the aftermath of the global financial and sovereign debt crises, the EU took decisive actions, in line with international calls for reform, to create a safer financial sector for the EU single market. This included providing the tools and powers to handle the failure of any bank in an orderly manner, while preserving financial stability, public finances and depositor protection. The Banking Union was created in 2014 and is currently made up of two pillars: a Single Supervisory Mechanism (SSM) and a Single Resolution Mechanism (SRM). However, the Banking Union is still incomplete and is missing its third pillar: a European deposit insurance scheme (EDIS)⁴. The Commission’s proposal adopted on 24 November 2015 to establish EDIS ⁵ is still pending.

The Banking Union is supported by a Single Rulebook which, in what concerns the CMDI, is made up of three EU legal acts adopted in 2014: the BRRD, the SRMR and the DGSD. The BRRD defines the powers, rules and procedures for the recovery and resolution of banks, including cross-border cooperation arrangements to tackle cross-border banking failures. The SRMR creates the Single Resolution Board (SRB) and the Single Resolution Fund (SRF) and defines powers, rules and procedures for the resolution of the entities established in the Banking Union, in the context of the single resolution mechanism. The DGSD ensures the protection of depositors and sets-out the rules for the use of DGS funds. The BRRD and the DGSD apply in all Member States while the SRMR applies in Member States participating in the Banking Union.

The 2019 banking package, also known as the ‘risk reduction package’, revised the BRRD, the SRMR, the Capital Requirements Regulation (CRR)⁶ and the Capital Requirements Directive (CRD)⁷. These revisions included measures delivering on the EU’s commitments made in international fora ⁸ to take further steps towards completing the Banking Union by providing credible risk reduction measures to mitigate threats to financial stability.

In November 2020, the Eurogroup agreed on the creation and early introduction of a common backstop to the SRF by the European Stability Mechanism (ESM)⁹.

The crisis management and deposit insurance (CMDI) reform and the broader implications for the Banking Union

Together with the CMDI reform, a complete Banking Union, including its third pillar, EDIS, would offer a higher level of financial protection and confidence to EU’s households and businesses, increase trust and strengthen financial stability as necessary conditions for growth, prosperity and resilience in the Economic and Monetary Union and in the EU more generally. The Capital Markets Union complements the Banking Union as both initiatives are essential to finance the twin transitions (digital and green), step up the international role of the euro and strengthen the EU’s open strategic autonomy and its competitiveness in a changing world, particularly considering the current challenging economic and geopolitical environment ¹⁰^, ¹¹.

In June 2022, the Eurogroup did not agree to a more comprehensive work plan to complete the Banking Union by including EDIS. Instead, the Eurogroup invited the Commission to table more targeted legislative proposals for reforming the EU framework for bank crisis management and national deposit insurance ¹².

In parallel, the European Parliament, in its 2021 annual report on the Banking Union ¹³, also stressed the importance of completing it with the establishment of EDIS and supported the Commission in putting forward a legislative proposal on the CMDI review. While EDIS was not explicitly endorsed by the Eurogroup, it would make the CMDI reform more robust and it would deliver synergies and efficiency gains for the industry. Such a legislative package would be part of the agenda for completing the Banking Union, as emphasised in President von der Leyen’s Political Guidelines, which also recalled the importance of EDIS, and as regularly supported by leaders ¹⁴.

The objectives of the crisis management and deposit insurance (CMDI) framework

The CMDI framework was designed to mitigate the risks and manage the failure of institutions of any size, while achieving four overarching objectives:
(iii) minimise recourse to taxpayer money and weaken the bank-sovereign loop and
The amendments included in the CMDI package cover a range of policy aspects and constitute a coherent response to the identified problems:
- ensuring a timely triggering of resolution; and
To minimise divergences and widen the application of the PIA, i.e. broadening the scope of resolution, the proposal includes the following legislative amendments:

1. The CMDI framework was designed to mitigate the risks and manage the failure of institutions of any size, while achieving four overarching objectives:

(i) protect financial stability while avoiding contagion, thereby ensuring market discipline and continuity of critical functions for society,

(ii) safeguard the functioning of the single market and provide a level playing field across the EU;

2. (iii) minimise recourse to taxpayer money and weaken the bank-sovereign loop and

(iv) protect depositors and ensure consumer confidence.

The CMDI framework provides for a set of instruments that can be applied in the various stages of the life cycle of banks in distress: recovery action supported by recovery plans drafted by banks; early intervention measures; measures to prevent the failure of a bank; resolution plans prepared by resolution authorities; and a resolution toolbox when the bank is declared failing or likely to fail and it is deemed that the resolution of the bank (rather than its liquidation) is in the public interest. Additionally, national insolvency procedures, which are outside of the CMDI framework ¹⁵ continue to apply for those failing banks that can be dealt with under these national procedures, where they are more suitable (rather than resolution) and do not harm public interest or endanger financial stability.

The CMDI framework is aimed at providing a combination of funding sources to manage failures in an economically efficient manner, protecting financial stability and depositors and maintaining market discipline, while reducing recourse to the public budget and ultimately the cost to taxpayers. The cost of resolving the bank is first covered through the bank’s own resources, i.e. allocated to the shareholders and creditors of the bank itself (constituting the bank’s internal loss absorbing capacity), which also reduces moral hazard and improves market discipline. If needed, it can be complemented by funds from deposit guarantee schemes (DGS) and resolution financing arrangements (national resolution funds (RF) or the SRF in the Banking Union). These funds are financed by contributions by all banks irrespective of their size and business model. In the Banking Union, these rules were further integrated by entrusting the SRB with managing and overseeing the SRF, which is funded by contributions from the industry in the participating Member States of the Banking Union. Depending on the tool applied to a bank in distress (e.g. preventive, precautionary, resolution or alternative measures under national insolvency proceedings) and the specific details of the case, State aid ¹⁶ control may be necessary for interventions by an RF/SRF, a DGS or public funding from the State budget.

Reasons for the proposal

Notwithstanding the progress achieved since 2014, resolution has been rarely applied, especially in the Banking Union. Areas for further strengthening and adjustment were identified as regards the CMDI framework in terms of design, implementation and most importantly, incentives for its application.

To date, many failing banks of a smaller or medium size have been dealt with under national regimes often involving the use of taxpayer money (bailouts) instead of the industry-funded safety nets, such as the SRF in the Banking Union that so far has been unused in resolution. This goes against the intention of the framework as it was set-up after the global financial crisis, which involved a major paradigm shift from bailout to bail-in. In this context, the opportunity cost of the resolution financing arrangements financed by all banks is considerable.

The resolution framework did not fully deliver on key overarching objectives, notably facilitating the functioning of the EU single market in banking by ensuring a level playing field, handling cross-border and domestic crises and minimising recourse to taxpayer money.

The reasons are mainly due to misaligned incentives in choosing the right tool to manage failing banks, leading to the non-application of the harmonised resolution framework, in favour of other avenues. This is due overall to the broad discretion in the public interest assessment, difficulties in accessing funding in resolution without imposing losses on depositors, and easier access to funding outside of resolution.Following this path raises risks of fragmentation and suboptimal outcomes in managing banks’ failures, in particular those of smaller and medium-sized banks.

The review of the CMDI framework and the interaction with national insolvency proceedings should provide solutions to address these issues. It should also enable the framework to fully achieve its objectives and be fit for purpose for all banks in the EU irrespective of their size, business model and liability structure, even smaller and medium-sized banks, if required by prevailing circumstances. The revision should aim at ensuring a consistent application of the rules across Member States, delivering a better level playing field, while protecting financial stability and depositors, preventing contagion and reducing recourse to taxpayer money. In particular, the framework should be improved to facilitate the resolution of smaller and medium-sized banks as initially expected, by mitigating the impacts on financial stability and the real economy without recourse to public funding, and by fostering the confidence of their depositors, consisting primarily of households and small and medium-sized enterprises (SMEs). In terms of the magnitude of the changes envisaged, the CMDI review does not seek to overhaul the current framework but rather to bring much needed improvements in several key areas to make the framework work as intended for all banks.

Summary of the crisis management and deposit insurance (CMDI) reform elements

3. The amendments included in the CMDI package cover a range of policy aspects and constitute a coherent response to the identified problems:

- expanding the scope of resolution by reviewing the public interest assessment, when this achieves the objectives of the framework, e.g. protecting financial stability, taxpayer money and depositor confidence better than national insolvency proceedings;

- strengthening the funding in resolution by complementing the internal loss- absorbing capacity of institutions, which remains the first line of defence, with the use of DGS funds in resolution to help access resolution funds without imposing losses on depositors where appropriate, subject to conditions and safeguards;

- amending the ranking of claims in insolvency and ensuring a general depositor preference with a single-tier depositor preference, with the aim of enabling the use of DGS funds in measures other than payout of covered deposits;

- harmonising the least cost test for all types of DGS interventions outside payout of covered deposits in insolvency to improve the level playing field and ensure consistency of outcomes;

- clarifying the early intervention framework by removing overlaps between early intervention and supervisory measures, providing legal certainty on the applicable conditions and facilitating cooperation between competent and resolution authorities;

4. - ensuring a timely triggering of resolution; and

- improving depositor protection (e.g. targeted improvements of DGSD provisions on scope of protection and cross-border cooperation, harmonisation of national options, and improvement of transparency on financial robustness of DGSs).

• Consistency with existing policy provisions in the policy area

The proposal puts forward amendments to the existing legislation to render it fully consistent with existing policy provisions in the area of bank crisis management and deposit insurance. The review of the BRRD/SRMR and of the DGSD aims at improving the functioning of the framework in a way that provides the tools to resolution authorities to be able to handle the failure of any bank, irrespective of size and business model, in order to preserve financial stability, protect depositors, and avoid recourse to taxpayer money.

• Consistency with other EU policies

The proposal builds on the reforms carried out in the aftermath of the financial crisis that led to the creation of the Banking Union and the single rulebook for all EU banks.

The proposal helps strengthen the EU financial legislation adopted in the last decade to reduce risks in the financial sector and ensure an orderly management of bank failures. The aim is to make the banking system more robust and ultimately promote the sustainable financing of economic activity in the EU. It is fully consistent with the EU's fundamental goals of promoting financial stability, reducing taxpayers’ support in bank resolution and protecting depositor confidence. These objectives are conducive to a high level of competitiveness and consumer protection.

2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY

• Legal basis

The proposal amends an existing regulation, the SRMR, in particular as regards the improved application of the tools that are already available in the bank resolution framework, clarifying the conditions for resolution, facilitating access to safety nets the event of bank failure and improving the clarity and consistency of funding rules. By establishing harmonised requirements for applying the CMDI framework to banks in the Member States participating in the SRM, the proposal considerably reduces the risk of divergent national rules in those Member States, which could distort competition in the internal market.

Consequently, the legal basis for the proposal is the same as the legal basis of the original legislative act, namely Article 114 TFEU. That provision allows for measures to be adopted for the approximation of national provisions which have as their objective the establishment and functioning of the internal market.

• Subsidiarity (for non-exclusive competence)

The legal basis falls within the internal market area, which is considered a shared competence, as defined by Article 4 TFEU. Most of the actions considered represent updates and amendments to existing EU law, and as such, they concern areas where the EU has already exercised its competence and does not intend to cease exercising such competence.

Given that the objectives pursued by the proposed measures aim at supplementing already existing EU legislation, they can be best achieved at EU level rather than by different national initiatives. In particular, the rationale for a specific and harmonised EU resolution regime for all banks in the EU was laid out at the inception of the framework in 2014. Its main features reflect international guidance and the ‘Key Attributes of Effective Resolution Regimes for Financial Institutions’ adopted by the Financial Stability Board in the aftermath of the 2008 global financial crisis.

The principle of subsidiarity is embedded in the existing resolution framework. Its objectives, namely the harmonisation of the rules and processes for resolution, cannot be sufficiently achieved by Member States. Rather, by reason of the effects of a failure of any institution in the whole EU, they can be better achieved at EU level through EU action.

The intention of the existing resolution framework has always been to provide a common toolbox to deal effectively with any bank failure, irrespective of its size, business model or location, in an orderly way, where this is necessary to preserve financial stability of the EU, the Member State or the region in which it operates, and to protect depositors without relying on public funds.

The proposal amends certain provisions of the SRMR to improve the existing framework, particularly when it comes to applying it to smaller and medium-sized banks, as otherwise it may not reach its objectives.

Risks to financial stability, depositor confidence or the use of public finances in one Member State may have far-reaching impacts on a cross-border basis and may ultimately contribute to a fragmentation of the single market. The lack of action at EU level for less significant banks and their perceived exclusion from a mutualised safety net would also potentially affect their ability to access markets and attract depositors when compared with significant banks. Furthermore, national solutions to tackle bank failures would worsen the bank-sovereign link and undermine the idea behind the Banking Union of introducing a paradigm shift from bail-out to bail-in.

Acting at EU level to reform the resolution framework will not prescribe the strategy that should be taken when banks fail. The choice between an EU harmonised resolution strategy/tool and the national liquidation strategy will remain at the discretion of the resolution authority on the basis of the public interest assessment. This is tailored to each specific failure case and not automatically driven by considerations such as the bank size, the geographical outreach of its activities and the structure of the banking sector. In practice, this makes the public interest assessment the subsidiarity test in the EU.

Thus, while a case-by-case basis needs to be used for assessing whether a bank undergoes resolution or not, it is crucial that the possibility for all banks to undergo resolution is preserved and that resolution authorities have the right incentives to opt for resolution, due to the potentially systemic nature of all institutions, as already provided for in the SRMR.

Member States may still consider liquidation for the smaller or medium-sized banks under the reformed framework. In this respect, national insolvency regimes (which are not harmonised) remain in place when an insolvency procedure is deemed a better alternative to resolution. The continuum of tools is preserved in this way, including those outside resolution, such as: preventive and precautionary measures; resolution tools; alternative measures within national insolvency proceedings and payout of covered deposits in the event of piecemeal liquidation.

Amending the SRMR is therefore considered the best option. It strikes the right balance between harmonising rules and maintaining national flexibility, where relevant. The amendments would further promote a uniform application of the resolution framework and the convergence of practices of supervisory and resolution authorities, as well as ensure a level playing field throughout the internal market for banking services. This is particularly important in the banking sector where many institutions operate across the EU internal market. National rules would not achieve these objectives.

• Proportionality

Under the principle of proportionality, the content and form of EU action should not exceed what is necessary to achieve its objectives, consistent with the overall objectives of the Treaties.

Proportionality has been an integral part of the impact assessment accompanying the proposal. The proposed amendments have been individually assessed against the proportionality objective. In addition, the lack of proportionality of the existing rules has been assessed in several areas and specific options have been analysed aimed at reducing administrative burden and compliance costs for smaller institutions, in particular by removing the obligation to determine the minimum requirement for own funds and eligible liabilities (MREL) for certain types of entities.

The conditions to access the resolution financing arrangements under the current framework do not sufficiently account for distinctions on grounds of proportionality based on the resolution strategy, size and/or business model. The ability of banks to fulfil the access conditions to the resolution financing arrangement depends on the stock of bail-inable instruments available in their balance sheets at the time of the intervention. However, evidence suggests that some (smaller and medium-sized) banks in certain markets face structural difficulties in building up the MREL. For those banks, considering their specific liability structure (particularly those relying significantly on deposit funding), certain deposits would need to be bailed-in in order to access the resolution financing arrangement, which may raise concerns of financial stability and operational feasibility considering the economic and social impact in several Member States. The proposed amendments (e.g. clear rules on tailoring the MREL for transfer resolution strategies, introducing a single-tier depositor preference and allowing DGS funds to bridge the gap to access the resolution financing arrangement) would improve access to funding in resolution. They would also introduce more proportionality for banks that would be resolved under transfer strategies, by allowing the protection of deposits from bail-in where appropriate, and addressing effectively the problem of funding of resolution without weakening the minimum bail-in conditions for accessing the resolution financing arrangement.

• Choice of the instrument

It is proposed that the measures be implemented by amending the SRM Regulation through a regulation. The proposed measures refer to or further develop already existing provisions inbuilt in this legal instrument.

3. RESULTS OF EX POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS

• Ex post evaluations/fitness checks of existing legislation

The CMDI framework was designed to avert and manage the failure of institutions of any size or business model. It was developed with the objectives of maintaining financial stability, protecting depositors, minimising the use of public support, limiting moral hazard, and improving the internal market for financial services. The evaluation concluded that, overall, the CMDI framework should be improved in certain respects, such as better protection of taxpayer money.

In particular, the evaluation shows that legal certainty and predictability in managing bank failures remains insufficient. The decision of public authorities on whether to resort to resolution or insolvency may differ considerably across Member States. In addition, safety nets financed by the industry are not always effective and divergent access conditions to funding in resolution and outside resolution persist. These affect incentives and create opportunities for arbitrage when decisions are made on what crisis management tool to use. Finally, depositor protection remains uneven and inconsistent across Member States in a number of areas.

• Stakeholder consultations

The Commission conducted extensive exchanges through different consultation tools to reach out to all stakeholders involved, in order to better understand how the framework performed as well as the possible scope for improvements.

In 2020, the Commission launched a consultation on a combined inception impact assessment and a roadmap aimed at providing a detailed analysis of actions to be taken at EU level and the potential impact of different policy options on the economy, society and the environment.

In 2021, the Commission launched two consultations: a targeted and a public consultation to seek stakeholder feedback on how the CMDI framework was applied and views on possible modifications. The targeted consultation, comprising 39 general and specific technical questions, was available in English only and open from 26 January to 20 April 2021. The public consultation consisted of 10 general questions, available in all EU languages and ran over the feedback period from 25 February to 20 May 2021.

In addition, the Commission hosted a high-level conference on 18 March 2021 gathering representatives from all relevant stakeholders. The conference confirmed the importance of an effective framework but also highlighted the current weaknesses.

Commission staff have also repeatedly consulted Member States on the EU implementation of the CMDI framework and on possible revisions of the BRRD/SRMR and DGSD in the context of the Commission Expert Group on Banking, Payments and Insurance. In parallel to the discussions in the Expert Group, the issues addressed in this proposal were also covered in meetings of the Council’s preparatory bodies, namely the Council Working Party on Financial Services and the Banking Union and the High-Level Working Group on EDIS.

Furthermore, during the preparatory phase of the legislation, Commission staff also held numerous meetings (physical and virtual) with representatives of the banking industry and with other stakeholders.

The results of all the above-mentioned initiatives have fed into the preparation of this proposal and the accompanying impact assessment. They have provided clear evidence of the need to update and complete the current rules to best achieve the objectives of the framework. Annex 2 of the impact assessment provides the summaries of these consultations and the public conference.

• Collection and use of expertise

The Commission issued a call for advice to the European Banking Authority (EBA) on funding in insolvency and resolution. The Commission sought targeted technical advice to: (i) assess the reported difficulty for some smaller and medium-sized banks to issue sufficient loss-absorbing financial instruments; (ii) examine the current requirements to access available sources of funding in the current framework; and (iii) assess the quantitative impacts of various possible policy options in the area of funding in resolution and insolvency and their effectiveness in achieving the policy objectives. The EBA responded in October 2021 ¹⁷.

The Commission also benefited from the opinion provided by the Fit for Future Platform in December 2021. The opinion highlighted the need to make the CMDI framework fit for purpose for all banks, in a proportionate manner, taking into consideration the potential impact on depositors’ confidence and on financial stability.

• Impact assessment¹⁸

The proposal has been subject to an extensive impact assessment taking into account the feedback received from stakeholders and the need to address various interconnected issues spanning three different legal texts.

The impact assessment considered a range of policy options to address the problems identified in the design and implementation of the crisis management and deposit insurance framework. Given the strong links between the crisis management toolbox and its funding, the impact assessment considered packages of policy options that bundle together relevant design features of the CMDI framework to ensure a comprehensive and consistent approach. Some changes proposed – related to early intervention measures, the triggers to determine whether a bank is failing or likely to fail, and the harmonisation of certain features of the DGSD – are common across the option packages considered.

The different packages of options are mainly focused on analysing the spectrum of possibilities to broaden credibly and effectively the scope of resolution as a function of the level of ambition in making the funding more accessible. In particular, the policy options consider facilitating the use of DGS funds in resolution, including serving as a bridge, under the least-cost test safeguard, to improve the proportionality in accessing the resolution financing arrangements for banks, particularly smaller and medium-sized banks, being subject to transfer strategies with market exit. In addition, the policy options explore the possibility of using DGS funds more effectively and efficiently under a harmonised least cost test for measures other than the payout of covered deposits, seeking to improve the compatibility of incentives for resolution authorities when selecting the most appropriate tool to manage a crisis. Unlocking DGS funds for measures other than the payout of covered deposits depends on where the DGS ranks in the hierarchy of claims. Therefore, the policy options also explore different scenarios of harmonisation of depositor preference.

In light of these elements, the impact assessment explores three possible packages of policy options that deliver outcomes with varying ranges of ambition. Each package strives to create an incentive-based framework, by encouraging the application of resolution tools in a more consistent manner, increasing legal certainty and predictability, levelling the playing field, and facilitating access to common safety nets, all while maintaining some alternatives outside resolution under national insolvency procedures. However, by design, the packages of options achieve these objectives to a varying extent and their political feasibility differs.

The preferred option envisages ambitious improvements in the funding equation, opening the possibility for the resolution scope to be substantially broadened to include more smaller and medium-sized banks and a better alignment of incentives for deciding on the best crisis tool for these institutions. It was considered more effective, efficient and coherent in achieving the objectives of the framework relative to other options, including the baseline where no action is taken. In particular, the removal of the super-preference for the DGS was identified as the most effective means of ensuring that DGS funds can be used in resolution. The existence of a super-preference for DGS claims is the main reason why the DGS funds can almost never be used outside a payout of covered deposits in insolvency because of the impact it has on the outcome of the least cost test (LCT) that privileges a payout. However, it was found that the super-preference ends up protecting the financial means of the DGS and the banking sector from possible replenishment by hindering any DGS intervention in resolution, without bringing a better protection for covered deposits. Therefore, the removal of the DGS super-preference is necessary to address the existing outcome of the LCT assessment that is skewed towards payout and to provide adequate funding in resolution to make the resolution of smaller and medium-sized banks through a transfer of business and market exit of the failed bank feasible.

The impact assessment also included another option consisting of an ambitious reform of the CMDI framework including EDIS, in the form of an intermediate, hybrid model, different from the 2015 Commission proposal. This option acknowledges the importance of establishing a common deposit insurance system for the robustness of the framework and the completion of the Banking Union; however, it has been assessed as politically unfeasible at this stage.

The proposal would entail costs for authorities and certain banks, depending on the extent to which resolution would be expanded on the basis of case-by-case public interest assessments and the specific circumstances of each case. Using the DGS funds and the RF/SRF would be more cost-efficient in terms of financial means required to be used, however it may also trigger replenishment needs through contributions from the industry. Overall, costs for resolution authorities and banks would, however, be compensated by the benefits of enhanced preparedness for a larger spectrum of banks, clarified incentives when deciding which crisis tools to use, reduced recourse to taxpayer funds, and increased financial stability and depositor confidence, all thanks to clearer rules and access to industry-funded safety nets. For consumers and the public, the costs should be limited and clearly outweighed by the benefits, particularly through increased depositor protection, financial stability and reduced use of taxpayer money.

The Regulatory Scrutiny Board endorsed the impact assessment following a first negative opinion. To address the comments raised by the Board, the impact assessment has been extended to include additional explanations on: (i) the nature of the problems the review aims to address and the general merits of resolution compared with insolvency proceedings to protect financial stability, depositor confidence and minimise the recourse to taxpayers money; (ii) clarifications on how the reform complies with the principle of subsidiarity; and (iii) additional details on other aspects such as consistency with the review of State aid rules, the interaction with the 2015 Commission proposal on EDIS, how the EBA’s advice has been taken into account or the conditions in which DGS could intervene in resolution.

• Regulatory fitness and simplification

The review is mainly focused on the overall set-up and functioning of the crisis management and deposit insurance framework, with particular attention being paid to smaller and medium sized banks and a more equal treatment of depositors. The proposed reform is expected to bring benefits with respect to the effectiveness of the framework and legal clarity.

The reform is technology-neutral and does not impact digital readiness.

• Fundamental rights

The EU is committed to high standards of protection for fundamental rights and is a signatory to a broad set of conventions on human rights. In this context, the proposal complies with these rights, as listed in the main UN conventions on human rights, the Charter of Fundamental Rights of the European Union, which is an integral part of the EU Treaties and the European Convention on Human Rights.

4. BUDGETARY IMPLICATIONS

The proposal does not have implications for the EU budget.

5. OTHER ELEMENTS

• Implementation plans and monitoring, evaluation and reporting arrangements

The proposal requires Member States to transpose the amendments to the BRRD in their national laws within 18 months from the entry into force of the amending Directive.

The proposal includes requirements for the EBA to issue standards in relation to certain provisions of the framework and to report to the Commission on its effective implementation, e.g. in relation to resolvability assessments conducted by resolution authorities or the preparation for resolution execution.

The legislation will be subject to an evaluation 5 years after its implementation deadline in order to assess how effective and efficient it has been in terms of achieving its objectives and to decide whether new measures or amendments are needed.

6. DETAILED EXPLANATION OF THE SPECIFIC PROVISIONS OF THE PROPOSAL

Early intervention measures and preparation for resolution

Article 13 is replaced by a new set of articles (Articles 13 to 13c) mirroring the BRRD provisions on early intervention (Articles 27 to 29 BRRD), in order to provide the ECB with a directly applicable legal basis for the exercise of those powers. As in BRRD, the escalation mechanism between the different types of measures is clarified and it is specified that the prior adoption of early intervention measures, or the meeting of the conditions for early intervention, are not prerequisites to start the preparation for resolution or to exercise the related powers.

SRMR already included provisions concerning the cooperation and exchange of information between the Board and the ECB or national competent authorities (NCAs) when the financial situation of a bank starts deteriorating. However, those provisions needed to be strengthened to ensure better and more effective cooperation. The new Article 13c builds on the former Article 13 and provides additional details on cooperation in the run-up to resolution, concerning the type of information that should be exchanged, the situations in which the ECB or the NCA need to exchange information and the type of arrangements that the Board may put in place to prepare for resolution.

Early warning of failing or likely to fail

Article 13c includes an obligation for the ECB, or the NCA in relation to the less significant cross-border groups under the Board’s direct remit, to notify sufficiently early the Board as soon as it considers that there is a material risk that an institution or entity meets the conditions for being assessed as failing or likely to fail, as laid down in Article 18 i. This notification should include the reasons for the ECB/NCA’s assessment as well as an overview of the alternative solutions that may prevent the failure of the institution or entity concerned within a reasonable timeframe.

In recognition of the critical role that the timing of resolution action plays with respect to preserving as much as possible the levels of capital, MREL and liquidity of the institution or entity, and more generally, in ensuring that the necessary conditions are in place for the Board to successfully execute the resolution strategy prepared for each institution or entity, the Board is empowered to assess, in close cooperation with the ECB/NCA, what it considers to be a reasonable timeframe for the purposes of looking for solutions of private or administrative nature, able to prevent the failure. During this early warning period, the ECB/NCA should continue exercising its competences, while liaising with the Board in line with Article 13c. The ECB/NCA and the Board should monitor, in close cooperation, the evolution of the situation of the institution or entity and the implementation of alternative measures. In this context, the Board and the ECB/NCA should meet regularly, with a frequency set by the Board.

If no appropriate alternative measure which would avert the failure is found or implemented within this timeframe, the ECB/NCA should assess whether the institution or entity is failing or likely to fail. Where the ECB/NCA concludes that the institution or entity is failing or likely to fail, it should formally communicate this to the Board, following the procedure laid down in Article 18(1). The Board may also make this assessment itself, in compliance with the existing rules in Article 18(1), second subparagraph. The Board should then determine whether the conditions for resolution are met. Where the public interest assessment results in the need to resolve the institution or entity, the Board should adopt a resolution scheme. This is in line with the recent case law of the Court of Justice of the EU related to a case taking place in the Banking Union, according to which the ECB’s assessment is a preparatory measure designed to allow the Board to take a decision regarding the resolution of a bank. The Court further stated that the Board has the exclusive power to assess the conditions required for the application of resolution action, subject to the endorsement of the resolution scheme by the Commission and, where applicable, non-objection by the Council ¹⁹.

Public interest assessment (PIA)

The CMDI framework was designed to avert and manage the failure of institutions of any size while protecting depositors and taxpayers. When a bank is considered failing or likely to fail and there is a public interest in resolving it, the resolution authorities will intervene by using the tools and powers granted by the BRRD/SRMR in absence of a private solution. In the absence of a public interest for resolution, the bank failure should be handled through national orderly winding up proceedings carried out by national authorities, potentially with financing from the DGS or other funding sources, as appropriate.

In essence, the public interest assessment (PIA) compares resolution against insolvency, in particular assessing how each scenario achieves the resolution objectives. The resolution objectives against which the assessment is made include: (i) the impact on financial stability (a wide-spread crisis may result in a different outcome of the PIA than an idiosyncratic failure); (ii) the assessment of the impact on the bank’s critical functions; and (iii) the need to limit the use of extraordinary public financial support. Under the current framework, resolution can only be chosen where insolvency would not allow achieving the resolution objectives to the same extent.

The SRMR leaves margin of discretion to the Board when carrying out the PIA, which leads to divergent applications and interpretations that do not always fully reflect the logic and intention of the legislation. In some cases, the PIA has been applied rather restrictively in the Banking Union.

5. To minimise divergences and widen the application of the PIA, i.e. broadening the scope of resolution, the proposal includes the following legislative amendments:

Amendments to the resolution objectives

The resolution objective requiring minimising the reliance on extraordinary public financial support does not allow for a distinction between the use of national budget money and the use of industry-funded safety nets (the SRF or DGSs). Therefore, this resolution objective is amended to include a specific reference to support provided by the budget of a Member State, to indicate that funding provided by industry-funded safety nets should be considered preferable to funding supported by taxpayers’ money (Article 14(2)(c)). This is complemented with a change in the procedural rules on PIA, requiring the Board to consider and compare all extraordinary public financial support that can reasonably be expected to be provided to the institution in resolution against those in the insolvency counterfactual. If liquidation aid is expected in the insolvency counterfactual, this should lead to a positive PIA outcome (Article 18(5), second subparagraph).

The resolution objective related to depositor protection is amended to clarify that resolution should aim at protecting depositors, while minimising losses for deposit guarantee schemes. This means that resolution should be preferred if insolvency would be more costly for the DGS.

Procedural changes to the comparison between resolution and national insolvency proceedings

Under the current SRMR, the Board is expected to choose insolvency unless opting for resolution would better achieve the resolution objectives. The current text of Article 18(5) provides that resolution shall only be chosen when winding up the institution under normal insolvency proceedings would not meet the resolution objectives to the same extent. To make it possible to broaden the application of resolution, Article 18(5) is amended to clarify that national insolvency proceedings should be selected as the preferred strategy only when they achieve the framework’s objectives better than resolution (and not to the same extent). While keeping insolvency as the default option, the amendment leads to an increase in the burden of proof for resolution authorities in demonstrating that resolution is not in the public interest. Nevertheless, the PIA will remain a case-by-case decision at the discretion of the resolution authority.

Use of DGS in resolution

Under the current framework the decision on the use of DGS funds to finance resolution is taken by the Board after consulting the DGS and the amount of the DGS contribution is determined on the basis of the valuation of the losses that covered depositors would have suffered have they not been shielded from suffering losses. To ensure that the enhanced possibilities and strict conditions for the use of national DGS resources to finance transfer strategies in resolution under the amended Article 109 BRRD are also applied consistently in the Banking Union, Article 79 SRMR is amended to specify that the DGS to which the credit institution is affiliated should be used for the purposes and under the conditions laid down in Article 109 BRRD. In addition, the second and third subparagraphs of Article 79(5) SRMR, which mirror the conditions under the current Article 109(5), second and third subparagraphs BRRD, are deleted.

Given that within the Banking Union resolution decisions are taken by the Board while the financing might be provided from national DGS resources, the reference to Article 109 BRRD in the first paragraph of Article 79 SRMR also ensures that the enhanced role of the DGS under BRRD should apply in the decision-making process for banks under the Board’s remit. In particular, the calculation of the cost of repaying depositors for the purpose of limiting the amount of the DGS contribution to resolution remains at national level under the responsibility of the DGS based on the least cost test (LCT). The Board should determine the amount of the contribution to be provided by the DGS only after consulting the DGS on the results of this calculation and it should be bound by these results. Therefore, the Board should not be able to determine a DGS contribution to a transaction which would be above the cost of repaying depositors as calculated by the DGS according to the DGSD rules (no breaching of the LCT), nor higher than what is needed to reach the access condition to the resolution financing arrangement (8% total liabilities and own funds requirement).

Conditions for providing extraordinary public financial support

In order to ensure that public funds in the form of extraordinary public financial support are not used to support institutions or entities that are not financially viable, it is necessary to provide for strict conditions on when such support can be provided and what form it can take. The existing rules provide for certain limitations but are not sufficiently precise. Provision of extraordinary public financial support outside of resolution should be limited to cases of precautionary recapitalisation, preventive measures of DGS aimed at preserving the financial soundness and long-term viability of credit institutions, measures taken by DGS to preserve the access of depositors and other forms of support granted in the context of winding up proceedings. Providing extraordinary public financial support in any other situations outside of resolution should not be permitted and should result in the receiving institution or entity being considered as failing or likely fail.

Precautionary recapitalisation

Particular attention must be paid to the extraordinary public financial support granted in the form of precautionary recapitalisation. It is necessary to lay down more clearly the permissible forms of precautionary measures provided outside of resolution and aimed at recapitalising the entity concerned. The measures granted should be temporary in nature because they are supposed to address adverse consequences of external shocks and not used to compensate for intrinsic weaknesses linked, for example, to an outdated business model. Use of perpetual instruments, such as Common Equity Tier 1, should become exceptional and possible only if other forms of capital instruments would not be adequate. Such change is necessary to ensure that the support remains temporary in nature. Stronger and more explicit requirements on determining in advance the duration and exit strategy for the precautionary measures are also needed. The entity receiving support should be solvent at the time the measures are applied, i.e. assessed by the competent authority as not being in breach and not likely to breach the applicable capital requirements in the next 12 months. If the conditions under which the support is granted are not adhered to, the entity receiving the support should be considered as failing or likely to fail.

Amendments related to the minimum requirement for own funds and eligible liabilities (MREL)

MREL for transfer strategies

As already provided under the current framework, the level of the MREL requirement should reflect the preferred resolution strategy. The existing provision of Article 12d focuses on MREL calibration for bail-in strategies (requirement for loss absorption and recapitalisation amount, with detailed rules on how each should be adjusted, and on subordination requirements mostly geared towards ensuring compliance with the minimum 8% TLOF requirement). While acknowledging the possibility to use resolution tools other than bail-in, the current BRRD does not regulate in detail MREL calibration for transfer strategies. In practice, this leads to legal uncertainty and divergent methodologies applied by resolution authorities when setting MREL for such strategies.

It is therefore necessary to provide a clearer legal basis for distinguishing MREL calibration for transfer strategies from the one for bail-in, also for the sake of proportionality and consistent application. In this respect, a new Article 12da is added which sets out the principles which should be considered by the SRB when calibrating MREL for transfer strategies - size, business model, risk profile, transferability analysis, marketability, whether the strategy is asset transfer or share deal, complementary use of asset management vehicle for assets which cannot be transferred, and the amount which DGS is expected to contribute to finance the preferred strategy in resolution.

The amendments reinforce the principle that MREL should remain the first and main line of defence for all banks, including for those that will be subject to a transfer strategy and market exit, to ensure that losses are absorbed to the maximum extent possible by shareholders and creditors.

Estimating the combined buffer requirement in case of prohibition of certain distributions

To address an existing gap in legal clarity of the current framework with respect to the power to prohibit certain distributions in case of failure of an entity to meet the combined buffer requirement in addition to its MREL, in particular where the entity is not subject to the combined buffer requirement (under Article 104a of Directive 2013/36/EU) on the same basis as its MREL, a new paragraph 7 is added to Article 10a to clarify that the power to prohibit certain distributions should be applied on the basis of the estimation of the combined buffer requirement resulting from the delegated act under Article 45c i that specifies the methodology to be used by resolution authorities to estimate the combined buffer requirement in such circumstances.

De minimis exemption from certain MREL requirements

Under the existing MREL rules in SRMR, structurally subordinated liabilities referred to in Article 72b(2)(d)(iii) CRR are captured by the definition of ‘subordinated eligible instruments’ used throughout Article 12c SRMR. However, liabilities that are permitted to be eligible in CRR under the de minimis exemption in Article 72b i CRR do not qualify as ‘subordinated eligible instruments’ under the SRMR because paragraph 4 of Article 72b CRR is explicitly excluded from the definition in Article 3(1)(49b) SRMR.

To correct this inconsistency and in line with the approach followed in BRRD, a new paragraph 10 is added to Article 12c, allowing SRB to permit resolution entities to comply with the MREL subordination requirements using senior liabilities when the conditions in Article 72b i CRR are met.

To ensure alignment with the TLAC framework, resolution entities benefitting from the de minimis exemption may not have their MREL subordination requirement adjusted downwards by an amount equivalent to the 3.5% TREA allowance for TLAC pursuant to the second sentence of the first subparagraph of Article 12c i BRRD.

Contributions and irrevocable payment commitments

To take into account the end of the initial period for the build-up of the Fund and the ensuing reduction in the amount of regular ex ante contributions, technical amendments are made to Articles 69 and 71 to disconnect the maximum amount of ex post contributions that may be raised from the amount of the regular ex ante contributions, thus avoiding a disproportionately low cap on ex post contributions, as well as to allow for a deferral of the collection of the regular ex ante contributions in case the cost of an annual collection would not be proportionate to the amount to be raised. The treatment of irrevocable payment commitments is also clarified in Article 70, both as regards their use in resolution and as regards the procedure to follow in case an institution or entity ceases to be subject to the obligation to pay contributions.

In addition, to provide more transparency and certainty with respect to the share of irrevocable payment commitments in the total amount of ex ante contributions to be raised, it is clarified that the Board should determine such share on an annual basis, subject to the applicable limits.

Other provisions

Amendments to resolution planning

The Board is required to identify measures to be taken with respect to group entities when drafting group resolution plans. The intensity and level of detail of this work with respect to subsidiaries that are not resolution entities may vary depending on the size and risk profile of the institutions and entities concerned, the presence of critical functions and the group resolution strategy. SRMR is thus amended with the introduction of a new subparagraph in Article 8(10), which will allow resolution authorities to follow a simplified approach, where appropriate, when carrying out this task.

Clarifications on Article 27(9)

The current provisions of Article 27(9) and (10) are unclear as to what are the condition and the sequence of use of the SRF and alternative financing sources after the provision of initial financing of up to the 5 % TLOF limit and after all unsecured, non-preferred liabilities, other than eligible deposits, have been written down or converted in full. Therefore, paragraphs 9 and 10 of Article 27 are amended to provide legal clarity and additional flexibility to use the SRF beyond the 5% TLOF.

Governance of the Board

To facilitate continuity and the build-up of institutional expertise, amendments are made to Article 56 in order to establish the possibility for the Chair, the Vice-Chair and the permanent Members of the Board to serve a second term in office, in the same capacity as their first term. The procedure for the renewal of the Chair, Vice-Chair and Board Members has been designed while taking into account the procedure applicable to the renewal of the Chairpersons of the ESAs.

Other amendments are made to Article 43, 53 and 55 in order to grant a voting right to the Vice-Chair and accommodate this voting right throughout SRMR. His or her appointment follows the same procedure as this of the Chair and he or she is able to substitute the Chair in its absence or reasonable impediment. A treatment different for the Vice-Chair than for other members of the Board did not therefore seem justified.

Ranking of SRF claims

Article 22(6) provides that the Board should be able to recover any reasonable expenses properly incurred in connection with the use of resolution tools and powers from the institution under resolution as a preferred creditor. However, SRMR did not specify the relative ranking of the Board to other preferred creditors. It was also unclear how this provision could be operationalised, given that the ranking of claims in insolvency is exclusively laid down in national laws governing normal insolvency proceedings (even if that ranking is partially harmonised across the EU). The new paragraph 6 added to Article 76 clarifies that those claims of the Board should have, in each participating Member State, the same ranking as the claims of the national resolution funds pursuant to the new Article 108(9) BRRD (which should be above the claims of depositors and of DGSs).

Additionally, the SRF can be further used in resolution for the purposes identified in Article 76(1). So far, SRMR has not specified whether such use creates a claim in favour of the Board and, if so, on the insolvency ranking of such claim. A new paragraph 5 is added in Article 76 specifying that, where the activity of the institution under resolution is partially transferred to a bridge institution or a private purchaser with the support of the SRF, the Board should have a claim against the residual entity. The existence of such claim should be assessed on a case-by-case basis, depending on the resolution strategy and the way in which the SRF was concretely used, but it should be connected to the use of the SRF to bear losses in lieu of creditors, such as when the SRF is used to guarantee assets and liabilities transferred to a recipient or to cover the difference between the transferred assets and liabilities. Where the SRF is used to support the application of the bail-in tool as the primary resolution strategy (Article 27(1), point (a)), in lieu of the write down and conversion of the liabilities of certain creditors, this should not generate a claim against the institution under resolution, as it would eliminate the purpose of the SRF’s contribution. Compensations paid due to the breach of the ‘no creditor worse off’ principle should likewise not generate a claim in favour of the Board.

Allocation of responsibilities

Article 7 established a division of tasks whereby the Board has direct responsibility for entities under the direct responsibility of the ECB, for cross border less significant institutions, and for entities for which there has been a decision, either on the initiative of the Board, on this of a national competent authority, or on this of a Member State, that the Board would exercise direct responsibility. NRAs would retain primary responsibility over all other entities. However, although Article 7 was explicit on this division of tasks, the language of the articles of the Regulation that dealt with the specific responsibilities concerned, such as resolution planning, resolvability assessment, assessment of simplified obligations, MREL-setting or adoption of resolution schemes, referred only to the Board and thus did not make it fully clear that, in case of entities within their remit, the responsibility for the tasks mentioned laid with the NRAs. This point is clarified in Article 7.

Similarly, the power for the Board to prohibit certain distributions where an entity within its remit does not meet is combined buffer requirement in addition to its MREL was laid down in the SRMR, but the exact procedure governing the exercise of this power was not specified. It is now clarified in Article 10a(1) that the Board is able to instruct the relevant NRA to exercise this power.

A number of cases has also been identified in which powers were granted to NRAs in the BRRD but, in the absence of a mention in the SRMR, the modalities of their application in the case of entities under the direct remit of the Board were unclear. To address this issue, it is clarified in Article 12 that, for entities under its direct remit, the Board is responsible for granting the permission to call, redeem, repay or repurchase eligible liabilities instruments under Article 78a of Regulation (EU) No 575/2013. Article 8 is also amended to clarify that the Board is able, where it deems it necessary, to instruct NRAs to require an institution or entity to maintain detailed records of the financial contracts to which the institution is a party. It is further clarified in Article 18(11) that the Board is able to instruct NRAs to exercise their power to suspend some financial obligations following the determination that the institution or entity is failing or likely to fail, pursuant to Article 33a of Directive 2014/59/EU.

Amendments to Article 18 also clarify the division of tasks between the ECB and the national competent authorities as regards the failing or likely to fail assessment. In some situations, namely cross-border less significant groups, less significant institutions and entities receiving assistance from the SRF, and specific less significant institutions and entities for which it has been decided, on the initiative of the Board, of a national competent authority or of a Member State, that the Board will exercise direct responsibility, although the resolution scheme is adopted by the Board, the supervision of the institution or entity, and thus the assessment of whether an institution or entity is failing or likely to fail, is the responsibility of the national competent authority. It is therefore specified that the assessment of whether an institution or entity is failing or likely to fail is to be performed by the ECB for the significant institutions and by the relevant national competent authority for the less significant institutions and entities for which the Board adopts the resolution scheme.

Lastly, to reflect the establishment of the Single Resolution Mechanism, it is specified in Article 31 that NRAs should consult the Board before they act in accordance with Article 86 of the BRRD, that provides that normal insolvency proceedings in relation to institutions and entities within the scope of the BRRD shall not be commenced except at the initiative of the resolution authority and that a decision placing an institution or an entity into normal insolvency proceedings shall be taken only with the consent of the resolution authority.

Exchange of information

A number of amendments are made in order to facilitate access to information for the Board. Articles 30 and 34 are amended to clarify that the information that the Board may request from the ECB covers not only information available to it in its supervisory function but also information collected in its central bank function. Pursuant to Article 8(4a) of Council Regulation (EC) No 2533/98 ²⁰, the SRB should ensure the physical and logical protection of confidential statistical information and should require authorisation to the ECB for the further transmission that may be necessary for the execution of the tasks of the Board.

A new Article 30a is introduced allowing the SRB to obtain information held by the centralised automated mechanisms established by Article 32a of Directive (EU) 2015/849 ²¹, which may prove to be relevant when carrying out the public interest assessment. The SRB can only request information regarding the number of customers for which an entity is the only or principal banking partner. The SRB should receive that information by way of the authorities or public entities managing the centralised automated mechanisms, filtered of personal data that is not relevant for the performance of SRB’s tasks.

Amendments are also added to bring the ESRB, the ESAs and the DGS under the scope of the obligation to cooperate and share information with the SRB, including the possibility to conclude memoranda of understanding on information-sharing with the Board.

Furthermore, Article 34 is amended to allow the Board to specify the procedure and the form under which it requests information to be shared, as well as to specifically mention the ESM as one of the entities with which cooperation and information exchange may take place.

Finally, Article 74 is amended to provide for an early warning from the Board to the ECB and the Commission when it foresees a possible need to use the fiscal backstop, in order to allow for the timely activation of such backstop.

Disclosures

The SRMR rules on the protection of institution-specific confidential information are quite strict and could in the future hinder efforts towards further transparency regarding the banking sector. To address this issue, Article 88 is amended to allow the Board to disclose information that is not directly collected from institutions and entities within its remit but results from its own analyses, assessments and determinations when this would not undermine the protection of the public interest as regards financial, monetary or economic policy and that there is an overriding public interest in the disclosure.

Please note

Contents

1.

The CMDI framework was designed to mitigate the risks and manage the failure of institutions of any size, while achieving four overarching objectives:

2.

(iii) minimise recourse to taxpayer money and weaken the bank-sovereign loop and

3.

The amendments included in the CMDI package cover a range of policy aspects and constitute a coherent response to the identified problems:

4.

- ensuring a timely triggering of resolution; and

5.

To minimise divergences and widen the application of the PIA, i.e. broadening the scope of resolution, the proposal includes the following legislative amendments: