Making DGSs ‘fit for purpose’ – final compromise on DGSD reached as part of the CMDI framework reform package

QuickTake

Legislative proposals to reform the EU’s bank crisis management and deposit insurance (CMDI) framework (the Proposals)Proposal for a Directive of the European Parliament and of the Council amending Directive 2014/49/EU as regards the scope of deposit protection, use of deposit guarantee schemes funds, cross-border cooperation, and transparency, available here.Show Footnote were adopted by the European Commission (the Commission) in April 2023, as covered in an earlier Client Alert by PwC Legal’s EU RegCore. The Proposals are comprised of a legislative package of targeted amendments to the currently applicable banking recovery and resolution regime, as composed of the Bank Recovery and Resolution Directive (BRRD), the Single Resolution Mechanism Regulation (SRMR) and the Deposit Guarantee Schemes Directive (DGSD). In addressing a set of deficiencies in the current regime, the Proposals aim to make it easier for authorities to organise an orderly market exit for a failing bank of any size and business model. One year later, the question arises as to where we stand?

After the European Parliament Economic and Monetary Affairs (ECON) Committee held its first exchange on the Proposals on 20 September 2023, agreement on a final landing zone on the compromise as regards the deposit guarantee scheme (DGS) part of the CMDI reform package was reached in the European Parliament (the Parliament) over the weekend of 10 March 2024. The final (non-public) text on the compromise now secured provides an indication of the future direction of travel and what to expect from the CMDI framework going forward, also in terms of progress on completing the Banking Union more broadly.

Still earlier in March 2024, the ECON Committee reintroduced the Esther de Lange Report on the establishment of a European Deposit Insurance Scheme (EDIS) and is now, under rapporteur Othmar Karas (EPP, Austria), once again, aiming to reiterate the Parliament’s support for EDIS, in the form of a draft Resolution, crucially also as part of the broader CMDI framework in order to complete the Banking Union. While this renewed legislative push starkly juxtaposes the market turmoil in the US and Switzerland one year prior, only time will tell whether rapporteur Karas will be able to garner more political consensus on EDIS than his Dutch predecessor de Lange. For a more comprehensive overview of the issues and challenges related to the establishment of EDIS, visit PwC Legal’s earlier EU RegCORE Client Alert as part of the Banking Union series. This Client Alert provides a general overview of the final compromise now reached on the DGSD as part of the CMDI framework, in the Parliament.

Key takeaways

As the Commission has pointed out, it is conceivable that the adoption of the CMDI reforms together with the finalisation of the Banking Union, including the establishment of a EDIS as its third (and final) pillar, would significantly increase the level of financial protection to and confidence among EU households and businesses.Explanatory Memorandum, Proposal for a Directive of the European Parliament and of the Council amending Directive 2014/49/EU as regards the scope of deposit protection, use of deposit guarantee schemes funds, cross-border cooperation, and transparency, 2023/0115 (COD), available here.Show Footnote As mentioned in the Explanatory Memorandum of the Proposals, this would create a solid foundation of trust and bolster financial stability as essential prerequisites for fostering growth, prosperity, and resilience within the Economic and Monetary Union (i.e. the euro area) and the EU more broadly.Proposal for a Directive of the European Parliament and of the Council amending Directive 2014/49/EU as regards the scope of deposit protection, use of deposit guarantee schemes funds, cross-border cooperation, and transparency, 2023/0115 (COD), available here.Show Footnote

A small “reality check” reveals, however, that no significant progress appears to have been made since Eurogroup President Donohue’s letter to the European Council back in December 2020 as to overcoming the currently still looming dead-lock on reaching political consensus on EDIS.Available here.Show Footnote One and a half years later, in June 2022, the Eurogroup invited the Commission to advance legislative proposals specifically targeting the CMDI framework, that is, the BRRD, SRMR and DGSD, and thereby notably not agreeing on a more comprehensive roadmap for completing the Banking Union by including EDIS.Explanatory Memorandum, Proposal for a Directive of the European Parliament and of the Council amending Directive 2014/49/EU as regards the scope of deposit protection, use of deposit guarantee schemes funds, cross-border cooperation, and transparency, 2023/0115 (COD), available here.Show Footnote

Since the entry into force in 2014, the objective of the DGSD has been the harmonisation of rules concerning the functioning of DGS in order to protect depositors of all credit institutions, as well as to safeguard the stability of the EU banking system as a whole. To do so, at least one DGS was set up in every Member State such as to ensure fast reimbursement of depositors in the event of bank failures (payout). To that end, the Directive also requires every credit institution to join a DGS in its Member State.

As a result of the DGSD, depositors within the Single Market greatly benefitted from access to DGSs, in part, due to a broadened and clarified scope of coverage, faster repayment periods, improved information and robust funding requirements.Recital 7 Directive 2014/49/EU of the European Parliament and of the Council of 16 April 2014 on deposit guarantee schemes (recast) (DGSD).Show Footnote Moreover, DGSs are a crucial element to the prudential supervision of credit institutions in that they create solidarity between all institutions operating in the Single (financial) Market should one of them fail, regardless of their Member State of origin.

The beneficiaries of the coverage provided under the DGSs under the currently applicable DGSD are essentially all deposits held by individuals and companies whatever their size.Overview of DGSD available here.Show Footnote With the exception of small local authorities, the deposits of financial institutions and authorities are not covered. Notably, the deposits in non-EU currencies are also within the scope of coverage, which is important for small and medium-sized companies by virtue of their being active in several non-EU countries. Another crucial function of DGSs is their role in the crisis management of banks. By their ability to contribute to resolution or other – interim – measures, they allow for depositor access to covered deposits to be preserved.Explanatory Memorandum, Proposal for a Directive of the European Parliament and of the Council amending Directive 2014/49/EU as regards the scope of deposit protection, use of deposit guarantee schemes funds, cross-border cooperation, and transparency, 2023/0115 (COD), available here.Show Footnote

The currently applicable coverage level, that is EUR 100,000, applies per depositor per credit institution. In other words, the limit of EUR 100,000 applies to all aggregate accounts at the same bank, although for joint accounts (such as those belonging to a couple) the limit applies to each depositor. Certain other specific deposits, for example those linked to life events such as marriage, divorce, retirement, redundancy, invalidity or death, may be protected above the EUR 100,000 level but for a limited period of time (i.e., a minimum of 3 months and a maximum of 12 months).Overview of DGSD available here.Show Footnote

Notwithstanding the above and generally positive benefits for depositors thus far, the Commission confirmed in the Proposals that practical experience in applying the framework provided by the DGSD has given rise to areas for improvement. One area as such is the conceivably divergent interpretation of conditions for the use of DGS funds for interventions outside the payout of covered deposits, that is the scope of the function of DGSs to perform the other – interim – measures, as mentioned above, besides the payout of covered deposits.Explanatory Memorandum, Proposal for a Directive of the European Parliament and of the Council amending Directive 2014/49/EU as regards the scope of deposit protection, use of deposit guarantee schemes funds, cross-border cooperation, and transparency, 2023/0115 (COD), available here.Show Footnote

The targeted amendments to the DGSD under the Proposals as such are primarily based on the recommendations as set out in the five opinions published by the European Banking Authority (EBA) in supporting the Commission in the fulfilment of its mandate under Article 19(6) DGSD to evaluate the performance of the DGSD.  The first opinion on the eligibility of deposits, coverage level and cooperation between deposit guarantee schemes was submitted in August 2019 (available here). The second opinion on deposit guarantee scheme payouts was submitted in October 2019 (available here). The third opinion on deposit guarantee scheme funding and uses of deposit guarantee scheme funds was submitted in January 2020 (available here). The fourth opinion on the treatment of client funds was submitted in October 2021 (available here). Additionally, the Commission took into account the 2020 EBA’s opinion on the interplay between the EU Anti-money laundering Directive and the EU Deposit Guarantee Schemes Directive (available here) and the 2021 EBA’s biennial opinion on risks of money laundering and terrorist financing (ML/TF) affecting the EU's financial sector (available here).Show Footnote

Accordingly, the Proposals aim to address a range of policy aspects part of the CMDI reform as response to the shortcomings identified by the Commission evaluation. Specifically, the Proposals aim “to; 

1. Clarify the scope of depositor protection by addressing identified discrepancies to offer EU depositors a harmonised and robust level of protection; 
2. Harmonise the least cost test for all types of DGS interventions outside the payout of covered deposits in insolvency, to improve the level playing field and ensure consistency of outcomes when managing bank failures; 
3. Improve the functioning of DGSs by simplifying administrative procedures, while improving the transparency of their financial robustness and use of funds; 
4. Increase the convergence in DGS practices and among authorities; and 
5. Improve cross-border cooperation between DGSs in reimbursing depositors located in other EU Member States, or in case of exchange of DGS affiliation by banks.”Explanatory Memorandum, Proposal for a Directive of the European Parliament and of the Council amending Directive 2014/49/EU as regards the scope of deposit protection, use of deposit guarantee schemes funds, cross-border cooperation, and transparency, 2023/0115 (COD), available here.Show Footnote

The final compromise which has now been reached in Parliament on the DGS part of the Proposals, includes, amongst others, agreements on:

1. the minimum (and maximum) levels of protection DGSs are to ensure in the Member States. In the non-public version of the final text compromise reached in Parliament, Article 6 DGSD is amended such that Member State ensure a minimum deposit guarantee of EUR 500,000 and a maximum of EUR 2.500,000, thereby removing the EU-wide harmonised approach; 
2. the scope of deposits covered by the DGSs in the Member States. According to the final text, the scope of coverage extends to small-and-medium-sized-enterprises (SMEs) and other senior deposits as set out by the national insolvency hierarchy;   
3. the corrective measures to be taken by DGSs in the Member States. Under the compromise reached, DGSs shall take corrective measures where the level of funding falls below 40%. Where the level of funding falls below 1/3rd, the replenishment must be completed within two years; 
4. the possibility for DGSs to lend to each other remains maintained under the final text, in line with the Karas draft Resolution on EDIS; 
5. the ongoing requirements for institutional protection schemes (IPS) and respective mandates for technical standards on their functioning. The IPSs are set to become subject to internal controls and greater transparency under the final text. Moreover, the bespoke DGSD will empower EBA and the Commission to adopt regulatory technical standards (RTS) on the functioning of the IPSs. The least cost test will also become applicable in the case of an IPS; 
6. restructuring and remediation plan requirements for credit institutions when tapping into a DGS to demonstrate their long-term viability. In these cases, the DGS is to only cover any funding gaps. The restructuring plan can be reviewed by the resolution authority, which can also make recommendations. Interestingly, the final text leaves open whether this could also include liquidity support;   
7. excluding public support access to DGSs; and
8. subjecting third-country branches to DGS contributions. 

Outlook and next steps

With EDIS being taken off the CMDI reform package, for now, it remains to be seen how the Proposals and specifically the targeted amendments to the DGSD will be able to unfold their potential, especially as regards the improved application of tools already available in the deposit protection framework, if ultimately adopted.

Concurrently, the Parliament is advancing discussions on the renewed effort behind EDIS, in the form of the draft Resolution under rapporteur Othmar Karas. While the next debate on the draft Resolution is planned for 20 March 2024, stay tuned on PwC Legal’s EU RegCRORE microsite for further updates covering legislative and regulatory developments around the Banking Union. Whether and in how far the ca. 320 amendments, which have been tabled to that draft Resolution, will be capable of coherently complementing the CMDI framework, and the Banking Union more broadly, equally remains to be seen, as political consensus around risk sharing and reduction persists as significant headwind.

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