EU Commission: EU wants to facilitate bank resolution

According to the EU Commission, national financial authorities have too seldom liquidated medium-sized and smaller banks in distress. This should now be made easier – to protect customers. The proposal was met with criticism from Berlin.

Experts from the EU Commission emphasize that the proposals are not a response to the bank failures in the USA in March or to the emergency sale of Credit Suisse. After all, they have been working on their recommendations for much longer.

But the latest events and the resulting shock waves on the stock exchanges show, according to the Commission, that crisis management for banks needs to be improved. Deputy Commissioner Valdis Dombrovskis speaks of an important step towards completing the banking union:

Bank processing with the best possible customer protection

According to the Commission, national financial authorities have rarely wound up medium-sized and smaller banks in distress – often at the expense of taxpayers because the safety nets financed by the financial institutions were not used for support measures.

The Commission therefore wants to make it easier for the financial authorities of the member states to wind up ailing banks in such a way that customers and taxpayers are given the best possible protection, for example by transferring deposits from an ailing bank to a healthy one.

“Resolution authorities at EU and national level can continue to choose between resolution and insolvency,” emphasizes Commissioner Maired McGuiness. “But we are setting new criteria for this and we are making sure that the conditions are in place for the authorities to decide to go ahead with resolution if it is in the public interest.”

According to McGuinness, from the point of view of business and private customers, the liquidation of a bank is often the better solution than insolvency:

Customers will have uninterrupted access to their accounts, which will be transferred to a healthy bank, McGuiness said.

Bank balance protected up to 100,000 euros

It remains the case that bank balances are protected up to 100,000 euros. The limit is to be raised if customers temporarily have more money in their accounts because they have inherited or sold a property. In addition, depositor protection is to be extended to public institutions such as hospitals, schools and communities.

Commission Vice President Dombrovskis explains that shareholders and creditors are the first to be held liable for bank losses: “If a bank fails, taxpayers shouldn’t have to pay if the institution has exhausted its own ability to absorb losses.” More reliance should be placed on industry-created safety nets such as national deposit insurance schemes.

Criticism from Berlin

There should be longer transition periods for national institute guarantees, such as those that apply to savings banks and cooperative banks in Germany. Federal Finance Minister Christian Lindner had requested special rules in letters to Brussels.

But the German banking industry is not satisfied: Banks and savings banks rejected the proposal to make bank processing for small and medium-sized institutions the new standard, according to a press release. The CSU MEP Markus Ferber also criticizes this. With its proposal, the Commission is shooting at sparrows with cannons.

In the coming months, the EU Parliament and the member states will discuss the proposals. It will certainly not be a simple debate, says Vice-Commissioner Dombrovskis. In 2014, the EU established the banking union with a common bank supervisory authority and a resolution authority. A European deposit insurance scheme should follow as the third pillar. So far, this has failed primarily due to German resistance.