Following the global financial crisis of 2008 – 2009, the European Union embarked on a journey towards achieving a Banking Union for Eurozone countries, where harmonisation and integration across euro area banking systems are the key objectives. Much has been achieved in building this Banking Union, however, more work is underway.

The European Commission has recently published a package of legislative proposals to amend the European Union framework on banks’ crisis management and deposit insurance (“CMDI”) on 18 April 2023. Some radical changes are being envisaged through these proposals. The aim is to revisit the European Union framework to ensure that it is effective not only for larger banks, but also for medium-sized and small ones.

The current legal framework

The current framework brings to the EU a common toolbox, strategies and powers to effectively restructure failing banks, whilst ensuring depositor protection and financial stability. The regime consists of common rules for banks and authorities in all Member States which aim to ensure that bank failures are managed in an orderly and economically efficient manner. The Commission has put forward three legislative proposals amending the Bank Recovery and Resolution Directive (BRRD), the Single Resolution Mechanism Regulation (SRMR) and the Deposit Guarantee Schemes Directive (DGSD). The BRRD aims to ensure that shareholders and creditors of a failing bank carry an appropriate share of the burden brought about by the losses made by such bank. With this aim, the BRRD introduced the bail-in tool and other resolution actions which may be taken by national resolution authorities in safeguarding the bank’s stability or orderly exit from the market. The SRMR established the Single Resolution Board which in turn administers the Single Resolution Fund and which is directly monitoring or taking action upon certain larger banks within the European Union. Lastly, the DGSD requires EU Member States to set up at least one deposit guarantee scheme in their jurisdiction which all banks authorised in that Member State form part of and contribute to. The national Scheme steps in to cover deposits of customers of failing banks up to €100,000.

Deficiencies identified

Since the entry into force of the BRRD, the treatment of banks in crisis has proved that the current resolution framework was effective, however, the resolution solutions have sparsely been implemented in the Banking Union. Instead, national resolution authorities have generally resorted to applying the relevant national insolvency procedures to such banks, rather than selling the bank’s business to a private purchaser, or opting for a bail-in, amongst other resolution tools. According to the Commission’s impact assessment, since 2015, more than 70% of failed or failing banks in the Banking Union were managed outside of the resolution framework. The same can be said for Malta, where the BRRD was not utilised in the crises involving Pilatus Bank, Nemea Bank or Satabank.

The current resolution framework requires fulfilment by banks of certain conditions which have proved to be unattainable for many and this might have been a contributing factor in resolution authorities’ decisions to pursue the liquidation of banks using national legislation.

Proposed amendments

The current framework’s deficiencies have exposed the need for improvement of certain aspects of the resolution regime, in particular when it comes to its application to small and medium-sized banks in crisis. This will be particularly relevant for Malta given the size of Malta’s banks. The Commission has set out that the European resolution regime should not only focus on safeguarding institutions that are systemically important in the context of financial stability, but should also be utilised in the case of smaller sized banks.

The proposed CMDI framework would see an enhancement of the measures that can be taken by supervisory authorities (locally, the Malta Financial Services Authority) to enable them to intervene at an early stage of failure. In addition, a relaxation of the tests required prior to going into European style resolution will be made to allow for a broader application of the resolution rules to cover smaller institutions.

The proposals also include changes to the manner in which creditors are repaid in terms of the BRRD. In the second part of this article, we shall be exploring how the proposed amendments will affect the ranking of depositors. This will be particularly relevant for the thousands of depositors holding deposits with Maltese banks.

Read PART II of the article here.

This article was first published in the 'Times of Malta' on the 21st of June 2023.