MNI: EU Deal To Limit Deposit Guarantee Role In Bank Failure

The European Union’s Belgian presidency has brokered a compromise among member states in negotiations on the Crisis Management and Deposit Insurance regulation, in a first step to reopening long-stalled talks on strengthening the EU's Banking Union, officials close to talks told MNI.

Limiting the role of deposit guarantee schemes in the resolution of small and mid-size banks, allowing them to retain the so-called “super-priority” in the credit hierarchy assigned to them under the existing Bank Recovery and Resolution Directive, was key to agreement, sources said.

"The use of DGS in resolution is now more subject to safeguards and limited,” one national finance ministry official said.

The European Commission’s original proposal on CMDI had sought to extend resolution to smaller and mid-size banks which would otherwise be subject to liquidations, involving the potential use of public sector funds. This approach would have eased the sale of troubled banks to a solid buyer by allowing DGS funds to be tapped and provide a bridge to access the Single Resolutions Fund, which requires 8% of total liabilities and own funds to be bailed in first. (See MNI: EU Unlocks Talks On Overhauling Bank Crisis Management)

GERMAN OBJECTIONS

But, while the Commission argued that the use of DGS funds could bolster financial stability in the public interest, countries like Germany - with its large numbers of smaller savings banks - had strong objections.

German conservative member of the European Parliament Markus Ferber said he welcomed the Belgian compromise based on what he had heard so far and said it constituted a "noticeable improvement" on the Commission proposal.

"I also found the excessive reliance on DGS funds questionable and not always justified," he added.

Agreement on the CMDI is a precondition for restarting discussions on further completion of the Banking Union, including easing cross-border integration of banks, European Deposit Insurance and Regulatory Treatment of Sovereign Exposures, although the latter two subjects remain highly controversial and divisive.

The Belgian presidency said it was aiming to have a "negotiating mandate in the Council on CMDI before the end of June, which would be a major step towards completing the banking union."