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Lawmakers in the EU have finally come to a political agreement to reform how the bloc deals with failing banks, aiming to enhance financial stability while reducing the burden on taxpayers.
This agreement, reached late Tuesday between EU member states and the European Parliament, updates the EU’s frameworks for crisis management and deposit insurance, which are fundamental parts of the banking reforms established after the financial crisis.
Maria Luís Albuquerque, the EU Commissioner for Financial Services, stated that the deal represents “a major advancement in our efforts to boost financial stability, safeguard depositors, and alleviate the financial load on taxpayers when banks fail.”
The agreement makes resolution processes more predictable and applicable for small and medium-sized banks, which typically have been addressed through national insolvency procedures rather than EU methods.
“This crucial reform can significantly enhance the existing framework by offering better ways to handle smaller banks in crisis,” noted the Single Resolution Board, which oversees the resolution of failing banks in the EU.
Central to this deal is the increased use of industry-funded safety nets—specifically, national deposit guarantee schemes and the Single Resolution Fund in the Eurozone—to help cover costs associated with resolving smaller banks. These funds can now bridge financial gaps when a bank’s loss-absorbing capital is insufficient, eliminating the need to tap depositors or resort to state bailouts.
Nonetheless, the use of these funds will be governed by strict safeguards, pushed for by countries like France and Germany, which host some of the EU’s largest banks and aim to prevent potential moral hazards associated with industry-funded safety nets.
Authorities will continue to prioritize the bank’s minimum capital and eligible liabilities—designed to absorb losses during a crisis—as the first line of defense, ensuring that support from deposit guarantee schemes is treated as a “last resort” and stays within the limits of covered deposits.
The updated regulations also adjust the public interest test that helps determine if resolution is a better alternative than liquidation. New guidelines allow authorities to consider regional economic impacts, which are often seen with smaller banks, making resolution a more feasible option while keeping liquidation as the default approach.
The legislation also standardizes the “least cost test” for accessing funds from deposit guarantee schemes and clarifies the order of depositor claims, safeguarding covered deposits primarily and establishing a second tier for uncovered deposits from households and small to medium enterprises (SMEs).
“Today’s agreement demonstrates that co-legislators are committed to enhancing European integration by establishing a framework that supports more resolutions and greater access to the Single Resolution Fund, paving the way for fewer national solutions and favoring a unified framework,” remarked Aurore Lalucq, chair of the Parliament’s economic affairs committee.
