On 18 April 2023, the European Commission released its proposal for updating the EU Crisis Management and Deposit Insurance (CMDI) framework for banks. The proposal comes after recent turmoil in the banking sector made plain the gaps in the current rules.
Finance Watch believes that the Commission’s proposal on CMDI does not address the underlying issues that have made bank resolution in the EU largely unsuccessful so far.
Finance Watch, the pan-European NGO advocating to make finance serve society, would like to express serious reservations on the Commission’s proposal on reforming the CMDI framework.
- it puts additional burden on deposit guarantee funds, many of which are already underfunded for their original purpose, and cements structural deficiencies of the EU banking market: overcapacity, undifferentiated business models, and poor profitability;
- it effectively disapplies the “burden sharing” rule: lowering the 8% threshold is counterproductive and redistributes risk, once again, from investors to covered depositors and, ultimately, taxpayers;
- it introduces the concept of “regional systemic importance”, a novel concept in prudential regulation which appears diametrically at odds with the concept of the Banking Union and EU single market; and
- if adopted, the proposal will all but ensure that resolution decisions are driven, even more often, by short-term political expediency, instead of factual considerations about systemic risk and financial stability.
Christian M. Stiefmüller, Senior Advisor, Research & Advocacy at Finance Watch, said:
“After what happened with Credit Suisse, which left Swiss taxpayers with a bill of up to 200 billion Swiss francs, the EU should concentrate its efforts on further improving the resilience and resolvability of EU banks while placing more effective constraints on the use of public funds under national insolvency procedures. Today’s proposal from the European Commission looks more like an exercise in political pragmatism than a genuine solution that would improve the stability and robustness of the EU banking sector.“
With the Commission proposal now on the table, Finance Watch will propose amendments to the legislative text in due course. For more information, read the technical briefing below.
To arrange an interview with Christian M. Stiefmüller, Senior Advisor, Research & Advocacy at Finance Watch: please contact firstname.lastname@example.org
Finance Watch reaction to the publication of the Commission’s proposal on Crisis Management and Deposit Insurance in the EU.
Finance Watch would like to express serious reservations on the Commission’s Proposal on reforming the Crisis Management and Deposit Insurance (CMDI) framework. The proposed adoption of what is, in effect, a U.S.-style approach to bank resolution is debatable, but most importantly, it comes at the worst possible time.
The recent crisis at Credit Suisse, a global systemically important bank, has demonstrated that the post-crisis bank recovery and resolution framework, in its current state, still cannot be relied upon to stabilise and resolve a “too big to fail” institution. It seems fair to say that the CMDI framework in the EU – especially with the proposed amendments – would probably not fare much better in a similar situation.
The proposed changes to the EU recovery and resolution framework are, ostensibly, aimed at improving the resolvability of smaller, mainly deposit-funded institutions. The benefits it offers will, however, apply to EU banks of all sizes and its benefits will accrue, to a large extent, to EU G‑/D-SIBs and other medium-to-large (‘significant’) institutions, and their investors. By reducing pressure on medium-to-large institutions to diversify their funding structures, raise bail-inable funds and thereby become more resolvable, this proposal also cements structural deficiencies of the EU banking market which have been highlighted, time and again, by the ESRB, among many others, namely overcapacity, undifferentiated business models, and poor profitability.
The suggestion to effectively disapply the “burden sharing” rule, which requires that investors of a failing bank should bear losses of at least 8% of its total equity and liabilities before public, i.e. taxpayers’ funds, may be involved, sends the worst-possible signal to the capital markets, i.e. that member‑state governments are ready, once again, to lower the bar for large-scale bank bail-outs. Finance Watch objects, in particular, against the suggestion that contributions from the DGS to resolving a bank should count towards the 8% “burden sharing” threshold. Lowering this threshold is counterproductive and redistributes risk, once again, from investors to covered depositors and, ultimately, taxpayers.
Deposit guarantee schemes (DGS), were established for a different purpose, and for the benefit of a particular group of stakeholders, namely covered depositors. At the last reported date, 16 of 36 DGS in the EU were below their required (minimum) funding level, i.e. not even fully funded to fulfil their primary objective. Against this background, the suggestion to make these funds available to absorb losses in resolution, which should normally be absorbed by investors, appears ill-timed and oblivious to the interests of depositors.
The proposal also suggests to modify so-called ‘public interest test’, one of the key factors to determine if a distressed institution should be resolved, rather than being wound up under national insolvency law. In our view, it stands to reason that this ‘public interest’ should be assessed with reference to the section of the public who will actually bear the risk, i.e. who may end up funding the rescue or who might lose some of their protection if the limited funds available to the DGS are shared with other creditors. The proposal introduces the notion that some institutions should be resolved, using the full set of resolution tools, if needed to prevent economic disruption at the regional level. ‘Regional systemic importance’ is a novel concept in prudential regulation that is not to be found in the international frameworks of the Financial Stability Board (FSB) and Basel Committee (BCBS) and appears diametrically at odds with the concept of the Banking Union and EU single market.
The proposed approach is meant to solve the underlying problem that EU member-state insolvency law are not aligned, and some member state legislation provides national authorities with resolution instruments, including access to public-sector funding. Having failed to make progress on harmonising national bank insolvency the proposed approach now represents an unfortunate about-turn – if adopted, it will all but ensure that resolution decisions will be driven by short-term political expediency, instead of factual considerations about systemic risk and financial stability.
Christian M. Stiefmüller, Senior Advisor, Research & Advocacy at Finance Watch, said:
“The Commission has asked the right questions: how can we ensure that EU banks become more resolvable. Regrettably, this proposal does not offer a satisfactory answer. The Credit Suisse case should have been a reminder to everybody that major banks, including but not limited to G-SIBs, still are far from resolvable and taxpayers are still exposed. EU authorities are likely to face very similar problems in the event of a major EU bank failure. Although the Commission attempts to solve legitimate problems with the application of the current framework this Proposal will achieve very little for financial stability but only expose EU depositors, and taxpayers, to even more risk. If policymakers are serious about putting the EU banking sector on a robust, sustainable foundation member states will have to stop settling for the lowest common denominator and tackle the underlying issues, such as overcapacity, low profitability, lack of diversification in funding, and incompatible insolvency laws. Especially when the EU taxpayer is the one footing the bill.”
About Finance Watch
Finance Watch is an independently funded public interest association dedicated to making finance work for the good of society. Its mission is to strengthen the voice of society in the reform of financial regulation by conducting advocacy and presenting public interest arguments to lawmakers and the public. Finance Watch’s members include consumer groups, housing associations, trade unions, NGOs, financial experts, academics and other civil society groups that collectively represent a large number of European citizens. Finance Watch’s founding principles state that finance is essential for society in bringing capital to productive use in a transparent and sustainable manner, but that the legitimate pursuit of private interests by the financial industry should not be conducted to the detriment of society.
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