EUROPEAN COMMISSION Strasbourg, 18.4.2023 COM(2023) 227

EN EN

EUROPEAN

COMMISSION

Strasbourg, 18.4.2023

COM(2023) 227 final

2023/0112 (COD)

Proposal for a

DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL

amending Directive 2014/59/EU as regards early intervention measures, conditions for

resolution and financing of resolution action

(Text with EEA relevance)

{SWD(2023) 225-226 final} - {SEC(2023) 230 final}

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EXPLANATORY MEMORANDUM

1. CONTEXT OF THE PROPOSAL

• Reasons for and objectives of the proposal

The proposed amendments to Directive 2014/59/EU

(the Bank Recovery and Resolution

Directive or BRRD) are part of the crisis management and deposit insurance (CMDI)

legislative package that also includes amendments to Regulation (EU) No 806/2014

(the

Single Resolution Mechanism Regulation or SRMR) and to Directive 2014/49/EU

(the

Deposit Guarantee Schemes Directive or DGSD).

The EU crisis management framework is well-established, however, previous episodes of

bank failures have shown that there is need for improvements. The aim of the CMDI reform is

to build on the objectives of the crisis management framework and to ensure a more

consistent approach to resolution, so that any bank in crisis can exit the market in an orderly

manner, while preserving financial stability, taxpayer money and ensuring depositor

confidence. In particular, the existing resolution framework for smaller and medium-sized

banks needs to be strengthened with respect to its design, implementation and, most

importantly, incentives for its application, so that it can be more credibly applied to those

banks.

Context of the proposal

In the aftermath of the global financial and sovereign debt crises, the EU took decisive

actions, in line with international calls for reform, to create a safer financial sector for the EU

single market. This included providing the tools and powers to handle the failure of any bank

in an orderly manner, while preserving financial stability, public finances and depositor

protection. The Banking Union was created in 2014 and is currently made up of two pillars: a

Single Supervisory Mechanism (SSM) and a Single Resolution Mechanism (SRM). However,

the Banking Union is still incomplete and is missing its third pillar: a European deposit

insurance scheme (EDIS)

. The Commission’s proposal adopted on 24 November 2015 to

establish EDIS

is still pending.

The Banking Union is supported by a Single Rulebook which, in what concerns the CMDI, is

made up of three EU legal acts adopted in 2014: the BRRD, the SRMR and the DGSD. The

BRRD defines the powers, rules and procedures for the recovery and resolution of banks,

including cross-border cooperation arrangements to tackle cross-border banking failures. The

SRMR creates the Single Resolution Board (SRB) and the Single Resolution Fund (SRF) and

defines powers, rules and procedures for the resolution of the entities established in the

Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a

framework for the recovery and resolution of credit institutions and investment firms and amending

Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC,

2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU)

No 648/2012, of the European Parliament and of the Council (OJ L 173, 12.6.2014, p. 190).

Regulation (EU) No 806/2014 of the European Parliament and of the Council of 15 July 2014

establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain

investment firms in the framework of a Single Resolution Mechanism and a Single Resolution Fund and

amending Regulation (EU) No 1093/2010 (OJ L 225, 30.7.2014, p. 1).

Directive 2014/49/EU of the European Parliament and of the Council of 16 April 2014 on deposit

guarantee schemes (OJ L 173, 12.6.2014, p. 149).

Furthermore, there is still no agreement on a credible and robust mechanism for providing liquidity in

resolution in the Banking Union, in line with the standard set by international peers.

COM/2015/0586 final.

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Banking Union, in the context of the single resolution mechanism. The DGSD ensures the

protection of depositors and sets-out the rules for the use of DGS funds. The BRRD and the

DGSD apply in all Member States while the SRMR applies in Member States participating in

the Banking Union.

The 2019 banking package, also known as the ‘risk reduction package’, revised the BRRD,

the SRMR, the Capital Requirements Regulation (CRR)

and the Capital Requirements

Directive (CRD)

. These revisions included measures delivering on the EU’s commitments

made in international fora

to take further steps towards completing the Banking Union by

providing credible risk reduction measures to mitigate threats to financial stability.

In November 2020, the Eurogroup agreed on the creation and early introduction of a common

backstop to the SRF by the European Stability Mechanism (ESM)

The crisis management and deposit insurance (CMDI) reform and the broader

implications for the Banking Union

Together with the CMDI reform, a complete Banking Union, including its third pillar, EDIS,

would offer a higher level of financial protection and confidence to EU’s households and

businesses, increase trust and strengthen financial stability as necessary conditions for growth,

prosperity and resilience in the Economic and Monetary Union and in the EU more generally.

The Capital Markets Union complements the Banking Union as both initiatives are essential

to finance the twin transitions (digital and green), step up the international role of the euro and

strengthen the EU’s open strategic autonomy and its competitiveness in a changing world,

particularly considering the current challenging economic and geopolitical environment

In June 2022, the Eurogroup did not agree to a more comprehensive work plan to complete

the Banking Union by including EDIS. Instead, the Eurogroup invited the Commission to

table more targeted legislative proposals for reforming the EU framework for bank crisis

management and national deposit insurance

In parallel, the European Parliament, in its 2021 annual report on the Banking Union

, also

stressed the importance of completing it with the establishment of EDIS and supported the

Commission in putting forward a legislative proposal on the CMDI review. While EDIS was

not explicitly endorsed by the Eurogroup, it would make the CMDI reform more robust and it

Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on

prudential requirements for credit institutions and investment firms and amending Regulation (EU)

No 648/2012 (OJ L 176, 27.6.2013, p. 1).

Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the

activity of credit institutions and the prudential supervision of credit institutions, amending Directive

2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (OJ L 176, 27.6.2013, p. 338).

The Basel Committee on Banking Supervision and the Financial Stability Board (FSB). Financial

Stability Board (2014 updated version), Key Attributes of effective resolution regimes for financial

institutions and (2015), Principles on Loss-absorbing and Recapitalisation Capacity of Globally

Systemically Important Banks (G-SIBs) in Resolution, Total Loss-absorbing Capacity (TLAC) Term

Sheet.

Eurogroup (30 November 2020), Statement of the Eurogroup in inclusive format on the ESM reform

and the early introduction of the backstop to the Single Resolution Fund. The implementation would

take place over 2022-2024. However, the Agreement Amending the Treaty Establishing the European

Stability Mechanism is still pending ratification.

European Commission (2020), Commission Work Programme 2021, section 2.3, p. 5.

European Commission (2023), Long-term competitiveness of the EU: looking beyond 2030.

Eurogroup (16 June 2022), Eurogroup statement on the future of the Banking Union.

European Parliament (2022), Banking Union – annual report 2021; the European Parliament has issued

a report on the Banking Union every year starting 2015.

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would deliver synergies and efficiency gains for the industry. Such a legislative package

would be part of the agenda for completing the Banking Union, as emphasised in President

von der Leyen’s Political Guidelines, which also recalled the importance of EDIS, and as

regularly supported by leaders

The objectives of the crisis management and deposit insurance (CMDI) framework

The CMDI framework was designed to mitigate the risks and manage the failure of

institutions of any size, while achieving four overarching objectives:

(i) protect financial stability while avoiding contagion, thereby ensuring market

discipline and continuity of critical functions for society,

(ii) safeguard the functioning of the single market and provide a level playing field

across the EU;

(iii) minimise recourse to taxpayer money and weaken the bank-sovereign loop and

(iv) protect depositors and ensure consumer confidence.

The CMDI framework provides for a set of instruments that can be applied in the various

stages of the life cycle of banks in distress: recovery action supported by recovery plans

drafted by banks; early intervention measures; measures to prevent the failure of a bank;

resolution plans prepared by resolution authorities; and a resolution toolbox when the bank is

declared failing or likely to fail and it is deemed that the resolution of the bank (rather than its

liquidation) is in the public interest. Additionally, national insolvency procedures, which are

outside of the CMDI framework

continue to apply for those failing banks that can be dealt

with under these national procedures, where they are more suitable (rather than resolution)

and do not harm public interest or endanger financial stability.

The CMDI framework is aimed at providing a combination of funding sources to manage

failures in an economically efficient manner, protecting financial stability and depositors and

maintaining market discipline, while reducing recourse to the public budget and ultimately the

cost to taxpayers. The cost of resolving the bank is first covered through the bank’s own

resources, i.e. allocated to the shareholders and creditors of the bank itself (constituting the

bank’s internal loss absorbing capacity), which also reduces moral hazard and improves

market discipline. If needed, it can be complemented by funds from deposit guarantee

schemes (DGS) and resolution financing arrangements (national resolution funds (RF) or the

SRF in the Banking Union). These funds are financed by contributions by all banks

irrespective of their size and business model. In the Banking Union, these rules were further

integrated by entrusting the SRB with managing and overseeing the SRF, which is funded by

contributions from the industry in the participating Member States of the Banking Union.

Depending on the tool applied to a bank in distress (e.g. preventive, precautionary, resolution

or alternative measures under national insolvency proceedings) and the specific details of the

Euro Summit Meeting (24 March 2023), Statement of the Euro Summit, meeting in inclusive format.

National insolvency proceedings are not harmonised. However, the decision by the resolution authority

whether to place a failing bank in resolution, which requires a comparison between resolution and

national insolvency proceedings (public interest assessment), is part of the CMDI framework. If a

resolution authority decides not to place a failing bank in resolution, the case is subsequently treated at

national level, where the assessment of the initiation of insolvency proceedings or of other types of

winding up proceedings takes place, according to the specific details of national insolvency regimes.

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case, State aid

control may be necessary for interventions by an RF/SRF, a DGS or public

funding from the State budget.

Reasons for the proposal

Notwithstanding the progress achieved since 2014, resolution has been rarely applied,

especially in the Banking Union. Areas for further strengthening and adjustment were

identified as regards the CMDI framework in terms of design, implementation and most

importantly, incentives for its application.

To date, many failing banks of a smaller or medium size have been dealt with under national

regimes often involving the use of taxpayer money (bailouts) instead of the industry-funded

safety nets, such as the SRF in the Banking Union that so far has been unused in resolution.

This goes against the intention of the framework as it was set-up after the global financial

crisis, which involved a major paradigm shift from bailout to bail-in. In this context, the

opportunity cost of the resolution financing arrangements financed by all banks is

considerable.

The resolution framework did not fully deliver on key overarching objectives, notably

facilitating the functioning of the EU single market in banking by ensuring a level playing

field, handling cross-border and domestic crises and minimising recourse to taxpayer money.

The reasons are mainly due to misaligned incentives in choosing the right tool to manage

failing banks, leading to the non-application of the harmonised resolution framework, in

favour of other avenues. This is due overall to the broad discretion in the public interest

assessment, difficulties in accessing funding in resolution without imposing losses on

depositors, and easier access to funding outside of resolution. Following this path raises risks

of fragmentation and suboptimal outcomes in managing banks’ failures, in particular those of

smaller and medium-sized banks.

The review of the CMDI framework and the interaction with national insolvency proceedings

should provide solutions to address these issues. It should also enable the framework to fully

achieve its objectives and be fit for purpose for all banks in the EU irrespective of their size,

business model and liability structure, even smaller and medium-sized banks, if required by

prevailing circumstances. The revision should aim at ensuring a consistent application of the

rules across Member States, delivering a better level playing field, while protecting financial

stability and depositors, preventing contagion and reducing recourse to taxpayer money. In

particular, the framework should be improved to facilitate the resolution of smaller and

medium-sized banks as initially expected, by mitigating the impacts on financial stability and

the real economy without recourse to public funding, and by fostering the confidence of their

depositors, consisting primarily of households and small and medium-sized enterprises

(SMEs). In terms of the magnitude of the changes envisaged, the CMDI review does not seek

to overhaul the current framework but rather to bring much needed improvements in several

key areas to make the framework work as intended for all banks.

Summary of the crisis management and deposit insurance (CMDI) reform elements

The amendments included in the CMDI package cover a range of policy aspects and

constitute a coherent response to the identified problems:

State aid rules are intrinsically linked with and complementary to the CMDI framework. These rules are

not subject to this review and this impact assessment. In order to ensure consistency between the two

frameworks, the Eurogroup invited the Commission in November 2020 to conduct a review of the State

aid framework for banks, and to complete it in parallel with the CMDI framework review, ensuring its

entry into force at the same time with the updated CMDI framework.

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 expanding the scope of resolution by reviewing the public interest assessment,

when this achieves the objectives of the framework, e.g. protecting financial

stability, taxpayer money and depositor confidence better than national

insolvency proceedings;

 strengthening the funding in resolution by complementing the internal loss-

absorbing capacity of institutions, which remains the first line of defence, with

the use of DGS funds in resolution to help access resolution funds without

imposing losses on depositors where appropriate, subject to conditions and

safeguards;

 amending the ranking of claims in insolvency and ensuring a general depositor

preference with a single-tier depositor preference, with the aim of enabling the

use of DGS funds in measures other than payout of covered deposits;

 harmonising the least cost test for all types of DGS interventions outside

payout of covered deposits in insolvency to improve the level playing field and

ensure consistency of outcomes;

 clarifying the early intervention framework by removing overlaps between

early intervention and supervisory measures, providing legal certainty on the

applicable conditions and facilitating cooperation between competent and

resolution authorities;

 ensuring a timely triggering of resolution; and

 improving depositor protection (e.g. targeted improvements of DGSD

provisions on scope of protection and cross-border cooperation, harmonisation

of national options, and improvement of transparency on financial robustness

of DGSs).

• Consistency with existing policy provisions in the policy area

The proposal puts forward amendments to the existing legislation to render it fully consistent

with existing policy provisions in the area of bank crisis management and deposit insurance.

The review of the BRRD/SRMR and of the DGSD aims at improving the functioning of the

framework in a way that provides the tools to resolution authorities to be able to handle the

failure of any bank, irrespective of size and business model, in order to preserve financial

stability, protect depositors, and avoid recourse to taxpayer money.

• Consistency with other EU policies

The proposal builds on the reforms carried out in the aftermath of the financial crisis that led

to the creation of the Banking Union and the single rulebook for all EU banks.

The proposal helps strengthen the EU financial legislation adopted in the last decade to reduce

risks in the financial sector and ensure an orderly management of bank failures. The aim is to

make the banking system more robust and ultimately promote the sustainable financing of

economic activity in the EU. It is fully consistent with the EU's fundamental goals of

promoting financial stability, reducing taxpayers’ support in bank resolution and protecting

depositor confidence. These objectives are conducive to a high level of competitiveness and

consumer protection.

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2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY

• Legal basis

The proposal amends an existing directive, the BRRD, in particular as regards the improved

application of the tools that are already available in the bank recovery and resolution

framework, clarifying the conditions for resolution, facilitating access to safety nets in the

event of bank failure, and improving the clarity and consistency of funding rules. By

establishing harmonised requirements for applying the CMDI framework to banks in the

internal market, the proposal considerably reduces the risk of divergent national rules in

Member States, which could distort competition in the internal market.

Consequently, the legal basis for the proposal is the same as the legal basis of the original

legislative act, namely Article 114 TFEU. That provision allows for measures to be adopted

for the approximation of national provisions which have as their objective the establishment

and functioning of the internal market.

• Subsidiarity (for non-exclusive competence)

The legal basis falls within the internal market area, which is considered a shared competence,

as defined by Article 4 TFEU. Most of the actions considered represent updates and

amendments to existing EU law, and as such, they concern areas where the EU has already

exercised its competence and does not intend to cease exercising such competence.

Given that the objectives pursued by the proposed measures aim at supplementing already

existing EU legislation, they can be best achieved at EU level rather than by different national

initiatives. In particular, the rationale for a specific and harmonised EU resolution regime for

all banks in the EU was laid out at the inception of the framework in 2014. Its main features

reflect international guidance and the ‘Key Attributes of Effective Resolution Regimes for

Financial Institutions’ adopted by the Financial Stability Board in the aftermath of the 2008

global financial crisis.

The principle of subsidiarity is embedded in the existing resolution framework. Its objectives,

namely the harmonisation of the rules and processes for resolution, cannot be sufficiently

achieved by Member States. Rather, by reason of the effects of a failure of any institution in

the whole EU, they can be better achieved at EU level through EU action.

The intention of the existing resolution framework has always been to provide a common

toolbox to deal effectively with any bank failure, irrespective of its size, business model or

location, in an orderly way, where this is necessary to preserve financial stability of the EU,

the Member State or the region in which it operates, and to protect depositors without relying

on public funds.

The proposal amends certain provisions of the BRRD to improve the existing framework,

particularly when it comes to applying it to smaller and medium-sized banks, as otherwise it

may not reach its objectives.

Risks to financial stability, depositor confidence or the use of public finances in one Member

State may have far-reaching impacts on a cross-border basis and may ultimately contribute to

a fragmentation of the single market. The lack of action at EU level for less significant banks

and their perceived exclusion from a mutualised safety net would also potentially affect their

ability to access markets and attract depositors when compared with significant banks.

Furthermore, national solutions to tackle bank failures would worsen the bank-sovereign link

and undermine the idea behind the Banking Union of introducing a paradigm shift from bail-

out to bail-in.

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Acting at EU level to reform the resolution framework will not prescribe the strategy that

should be taken when banks fail. The choice between an EU harmonised resolution

strategy/tool and the national liquidation strategy will remain at the discretion of the

resolution authority on the basis of the public interest assessment. This is tailored to each

specific failure case and not automatically driven by considerations such as the bank size, the

geographical outreach of its activities and the structure of the banking sector. In practice, this

makes the public interest assessment the subsidiarity test in the EU.

Thus, while a case-by-case basis needs to be used for assessing whether a bank undergoes

resolution or not, it is crucial that the possibility for all banks to undergo resolution is

preserved and that resolution authorities have the right incentives to opt for resolution, due to

the potentially systemic nature of all institutions, as already provided for in the BRRD.

Member States may still consider liquidation for the smaller or medium-sized banks under the

reformed framework. In this respect, national insolvency regimes (which are not harmonised)

remain in place when an insolvency procedure is deemed a better alternative to resolution.

The continuum of tools is preserved in this way, including those outside resolution, such as:

preventive and precautionary measures; resolution tools; alternative measures within national

insolvency proceedings and payout of covered deposits in the event of piecemeal liquidation.

Amending the BRRD is therefore considered the best option. It strikes the right balance

between harmonising rules and maintaining national flexibility, where relevant. The

amendments would further promote a uniform application of the resolution framework and

the convergence of practices of supervisory and resolution authorities, as well as ensure a

level playing field throughout the internal market for banking services. This is particularly

important in the banking sector where many institutions operate across the EU internal

market. National rules would not achieve these objectives.

• Proportionality

Under the principle of proportionality, the content and form of EU action should not exceed

what is necessary to achieve its objectives, consistent with the overall objectives of the

Treaties.

Proportionality has been an integral part of the impact assessment accompanying the proposal.

The proposed amendments have been individually assessed against the proportionality

objective. In addition, the lack of proportionality of the existing rules has been assessed in

several areas and specific options have been analysed aimed at reducing administrative

burden and compliance costs for smaller institutions, in particular by removing the obligation

to determine the minimum requirement for own funds and eligible liabilities (MREL) for

certain types of entities.

The conditions to access the resolution financing arrangements under the current framework

do not sufficiently account for distinctions on grounds of proportionality based on the

resolution strategy, size and/or business model. The ability of banks to fulfil the access

conditions to the resolution financing arrangement depends on the stock of bail-inable

instruments available in their balance sheets at the time of the intervention. However,

evidence suggests that some (smaller and medium-sized) banks in certain markets face

structural difficulties in building up the MREL. For those banks, considering their specific

liability structure (particularly those relying significantly on deposit funding), certain deposits

would need to be bailed-in in order to access the resolution financing arrangement, which may

raise concerns of financial stability and operational feasibility considering the economic and

social impact in several Member States. The proposed amendments (e.g. clear rules on

tailoring the MREL for transfer resolution strategies, introducing a single-tier depositor

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preference and allowing DGS funds to bridge the gap to access the resolution financing

arrangement) would improve access to funding in resolution. They would also introduce more

proportionality for banks that would be resolved under transfer strategies, by allowing the

protection of deposits from bail-in where appropriate, and addressing effectively the problem

of funding of resolution without weakening the minimum bail-in conditions for accessing the

resolution financing arrangement.

• Choice of the instrument

It is proposed that the measures be implemented by amending the BRRD through a directive.

The proposed measures refer to or further develop already existing provisions incorporated in

this legal instrument.

Some of the proposed amendments, for instance those affecting market exit following a

negative public interest assessment, would leave Member States with a sufficient degree of

flexibility, at the stage of their transposition into national law, to maintain different national

rules on winding up.

3. RESULTS OF EX POST EVALUATIONS, STAKEHOLDER

CONSULTATIONS AND IMPACT ASSESSMENTS

• Ex post evaluations/fitness checks of existing legislation

The CMDI framework was designed to avert and manage the failure of institutions of any size

or business model. It was developed with the objectives of maintaining financial stability,

protecting depositors, minimising the use of public support, limiting moral hazard, and

improving the internal market for financial services. The evaluation concluded that, overall,

the CMDI framework should be improved in certain respects, such as better protection of

taxpayer money.

In particular, the evaluation shows that legal certainty and predictability in managing bank

failures remains insufficient. The decision of public authorities on whether to resort to

resolution or insolvency may differ considerably across Member States. In addition, safety

nets financed by the industry are not always effective and divergent access conditions to

funding in resolution and outside resolution persist. These affect incentives and create

opportunities for arbitrage when decisions are made on what crisis management tool to use.

Finally, depositor protection remains uneven and inconsistent across Member States in a

number of areas.

• Stakeholder consultations

The Commission conducted extensive exchanges through different consultation tools to reach

out to all stakeholders involved, in order to better understand how the framework performed

as well as the possible scope for improvements.

In 2020, the Commission launched a consultation on a combined inception impact assessment

and a roadmap aimed at providing a detailed analysis of actions to be taken at EU level and

the potential impact of different policy options on the economy, society and the environment.

In 2021, the Commission launched two consultations: a targeted and a public consultation to

seek stakeholder feedback on how the CMDI framework was applied and views on possible

modifications. The targeted consultation, comprising 39 general and specific technical

questions, was available in English only and open from 26 January to 20 April 2021. The

public consultation consisted of 10 general questions, available in all EU languages and ran

over the feedback period from 25 February to 20 May 2021.

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In addition, the Commission hosted a high-level conference on 18 March 2021 gathering

representatives from all relevant stakeholders. The conference confirmed the importance of an

effective framework but also highlighted the current weaknesses.

Commission staff have also repeatedly consulted Member States on the EU implementation of

the CMDI framework and on possible revisions of the BRRD/SRMR and DGSD in the

context of the Commission Expert Group on Banking, Payments and Insurance. In parallel to

the discussions in the Expert Group, the issues addressed in this proposal were also covered in

meetings of the Council’s preparatory bodies, namely the Council Working Party on Financial

Services and the Banking Union and the High-Level Working Group on EDIS.

Furthermore, during the preparatory phase of the legislation, Commission staff also held

numerous meetings (physical and virtual) with representatives of the banking industry and

with other stakeholders.

The results of all the above-mentioned initiatives have fed into the preparation of this

proposal and the accompanying impact assessment. They have provided clear evidence of the

need to update and complete the current rules to best achieve the objectives of the framework.

Annex 2 of the impact assessment provides the summaries of these consultations and the

public conference.

• Collection and use of expertise

The Commission issued a call for advice to the European Banking Authority (EBA) on

funding in insolvency and resolution. The Commission sought targeted technical advice to: (i)

assess the reported difficulty for some smaller and medium-sized banks to issue sufficient

loss-absorbing financial instruments; (ii) examine the current requirements to access available

sources of funding in the current framework; and (iii) assess the quantitative impacts of

various possible policy options in the area of funding in resolution and insolvency and their

effectiveness in achieving the policy objectives. The EBA responded in October 2021

The Commission also benefited from the opinion provided by the Fit for Future Platform in

December 2021. The opinion highlighted the need to make the CMDI framework fit for

purpose for all banks, in a proportionate manner, taking into consideration the potential

impact on depositors’ confidence and on financial stability.

• Impact assessment

The proposal has been subject to an extensive impact assessment taking into account the

feedback received from stakeholders and the need to address various interconnected issues

spanning three different legal texts.

The impact assessment considered a range of policy options to address the problems identified

in the design and implementation of the crisis management and deposit insurance framework.

Given the strong links between the crisis management toolbox and its funding, the impact

assessment considered packages of policy options that bundle together relevant design

features of the CMDI framework to ensure a comprehensive and consistent approach. Some

changes proposed – related to early intervention measures, the triggers to determine whether a

bank is failing or likely to fail, and the harmonisation of certain features of the DGSD – are

common across the option packages considered.

EBA (22 October 2021), Call for advice regarding funding in resolution and insolvency.

Please see references to SWD(2023)226 (summary sheet of the IA) and SEC(2023)230 (the positive

opinion of the Regulatory Scrutiny Board).

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The different packages of options are mainly focused on analysing the spectrum of

possibilities to broaden credibly and effectively the scope of resolution as a function of the

level of ambition in making the funding more accessible. In particular, the policy options

consider facilitating the use of DGS funds in resolution, including serving as a bridge, under

the least-cost test safeguard, to improve the proportionality in accessing the resolution

financing arrangements for banks, particularly smaller and medium-sized banks, being subject

to transfer strategies with market exit. In addition, the policy options explore the possibility of

using DGS funds more effectively and efficiently under a harmonised least cost test for

measures other than the payout of covered deposits, seeking to improve the compatibility of

incentives for resolution authorities when selecting the most appropriate tool to manage a

crisis. Unlocking DGS funds for measures other than the payout of covered deposits depends

on where the DGS ranks in the hierarchy of claims. Therefore, the policy options also explore

different scenarios of harmonisation of depositor preference.

In light of these elements, the impact assessment explores three possible packages of policy

options that deliver outcomes with varying ranges of ambition. Each package strives to create

an incentive-based framework, by encouraging the application of resolution tools in a more

consistent manner, increasing legal certainty and predictability, levelling the playing field,

and facilitating access to common safety nets, all while maintaining some alternatives outside

resolution under national insolvency procedures. However, by design, the packages of options

achieve these objectives to a varying extent and their political feasibility differs.

The preferred option envisages ambitious improvements in the funding equation, opening the

possibility for the resolution scope to be substantially broadened to include more smaller and

medium-sized banks and a better alignment of incentives for deciding on the best crisis tool

for these institutions. It was considered more effective, efficient and coherent in achieving the

objectives of the framework relative to other options, including the baseline where no action

is taken. In particular, the removal of the super-preference for the DGS was identified as the

most effective means of ensuring that DGS funds can be used in resolution. The existence of a

super-preference for DGS claims is the main reason why the DGS funds can almost never be

used outside a payout of covered deposits in insolvency because of the impact it has on the

outcome of the least cost test (LCT) that privileges a payout. However, it was found that the

super-preference ends up protecting the financial means of the DGS and the banking sector

from possible replenishment by hindering any DGS intervention in resolution, without

bringing a better protection for covered deposits. Therefore, the removal of the DGS super-

preference is necessary to address the existing outcome of the LCT assessment that is skewed

towards payout and to provide adequate funding in resolution to make the resolution of

smaller and medium-sized banks through a transfer of business and market exit of the failed

bank feasible.

The impact assessment also included another option consisting of an ambitious reform of the

CMDI framework including EDIS, in the form of an intermediate, hybrid model, different

from the 2015 Commission proposal. This option acknowledges the importance of

establishing a common deposit insurance system for the robustness of the framework and the

completion of the Banking Union; however, it has been assessed as politically unfeasible at

this stage.

The proposal would entail costs for authorities and certain banks, depending on the extent to

which resolution would be expanded on the basis of case-by-case public interest assessments

and the specific circumstances of each case. Using the DGS funds and the RF/SRF would be

more cost-efficient in terms of financial means required to be used, however it may also

trigger replenishment needs through contributions from the industry. Overall, costs for

resolution authorities and banks would, however, be compensated by the benefits of enhanced

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preparedness for a larger spectrum of banks, clarified incentives when deciding which crisis

tools to use, reduced recourse to taxpayer funds, and increased financial stability and

depositor confidence, all thanks to clearer rules and access to industry-funded safety nets. For

consumers and the public, the costs should be limited and clearly outweighed by the benefits,

particularly through increased depositor protection, financial stability and reduced use of

taxpayer money.

The Regulatory Scrutiny Board endorsed the impact assessment following a first negative

opinion. To address the comments raised by the Board, the impact assessment has been

extended to include additional explanations on: (i) the nature of the problems the review aims

to address and the general merits of resolution compared with insolvency proceedings to

protect financial stability, depositor confidence and minimise the recourse to taxpayers

money; (ii) clarifications on how the reform complies with the principle of subsidiarity; and

(iii) additional details on other aspects such as consistency with the review of State aid rules,

the interaction with the 2015 Commission proposal on EDIS, how the EBA’s advice has been

taken into account or the conditions in which DGS could intervene in resolution.

• Regulatory fitness and simplification

The review is mainly focused on the overall set-up and functioning of the crisis management

and deposit insurance framework, with particular attention being paid to smaller and medium

sized banks and a more equal treatment of depositors. The proposed reform is expected to

bring benefits with respect to the effectiveness of the framework and legal clarity.

The reform is technology-neutral and does not impact digital readiness.

• Fundamental rights

The EU is committed to high standards of protection for fundamental rights and is a signatory

to a broad set of conventions on human rights. In this context, the proposal complies with

these rights, as listed in the main UN conventions on human rights, the Charter of

Fundamental Rights of the European Union, which is an integral part of the EU Treaties and

the European Convention on Human Rights.

4. BUDGETARY IMPLICATIONS

The proposal does not have implications for the EU budget.

5. OTHER ELEMENTS

• Implementation plans and monitoring, evaluation and reporting arrangements

The proposal requires Member States to transpose the amendments to the BRRD in their

national laws within 18 months from the entry into force of the amending Directive.

The proposal includes requirements for the EBA to issue standards in relation to certain

provisions of the framework and to report to the Commission on its effective implementation,

e.g. in relation to resolvability assessments conducted by resolution authorities or the

preparation for resolution execution.

The legislation will be subject to an evaluation 5 years after its implementation deadline in

order to assess how effective and efficient it has been in terms of achieving its objectives and

to decide whether new measures or amendments are needed.

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6. DETAILED EXPLANATION OF THE SPECIFIC PROVISIONS OF THE

PROPOSAL

Early intervention measures and preparation for resolution

The conditions for applying early intervention measures, including the removal of

management and appointment of temporary managers, are amended to remove ambiguity and

provide competent authorities with the necessary legal certainty. Articles 27(1), 28 and 29(1)

are amended to provide that early intervention measures may be used when the conditions for

supervisory measures under CRD or Directive (EU) 2019/2034

(Investment Firms Directive

or IFD) have been met, but those measures have not been taken by the institution or are

deemed insufficient to address the identified issues. The existing triggers not covered by CRD

or IFD are preserved. At the same time, the internal sequencing between early intervention

measures, removal of managers and appointment of temporary managers is removed – under

the proposal, they are all subject to the same triggers, but competent authorities are required to

follow the proportionality principle when choosing the most appropriate measure for each

circumstance. The EBA mandate for guidelines promoting the consistent application of the

triggers is maintained.

The early intervention measures listed in Article 27 BRRD that overlapped with the available

supervisory powers under Article 104 CRD or Article 49 IFD (concerning the examination of

the financial situation by the management body, the removal of managers that no longer meet

the suitability criteria, changes to the business strategy and to the operational structure of the

institution) are removed from the BRRD and retained only in CRD/IFD. This should address

the practical and administrative challenges observed by competent authorities in applying

those overlapping measures.

To expand the limited provisions in BRRD requiring cooperation between competent and

resolution authorities when the financial situation of a bank starts deteriorating, a new Article

30a details the interactions and responsibilities of competent and resolution authorities in the

run-up to resolution. The competent authority is required to notify the resolution authority

when it adopts certain supervisory measures under CRD or IFD (particularly those that

previously overlapped with early intervention measures), when it considers that the conditions

for early intervention are met and when it actually applies early intervention measures.

Competent authorities in cooperation with resolution authorities should monitor the financial

situation of the institution and its compliance with any imposed measure. At the same time,

the competent authority must provide the resolution authority with all the information

necessary for preparing for resolution, or require the institution itself to provide it. It is also

clarified that the resolution authority has the power to market or make arrangements for the

marketing of the institution and to request the creation of a virtual data room without being

dependent on the prior application of early intervention measures. Competent and resolution

authorities are required to cooperate closely when considering taking any early intervention or

resolution preparation actions to ensure consistency and effectiveness.

Early warning of failing or likely to fail

Article 30a includes an obligation for the competent authority to notify sufficiently early the

resolution authority as soon as it considers that there is a material risk that an institution or

entity meets the conditions for being assessed as failing or likely to fail, as laid down in

Directive of the European Parliament and of the Council of 27 November 2019 on the prudential

supervision of investment firms and amending Directives 2002/87/EC, 2009/65/EC, 2011/61/EU,

2013/36/EU, 2014/59/EU and 2014/65/EU (OJ L 314, 5.12.2019, p. 64).

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Article 32(4). This notification should include the reasons for the competent authority's

assessment as well as an overview of the alternative solutions that may prevent the failure of

the institution or entity concerned within a reasonable timeframe.

In recognition of the critical role that the timing of resolution action plays with respect to

preserving as much as possible the levels of capital, MREL and liquidity of the institution or

entity, and more generally, in ensuring that the necessary conditions are in place for the

resolution authority to successfully execute the resolution strategy prepared for each

institution or entity, the resolution authority is empowered to assess, in close cooperation with

the competent authority, what it considers to be a reasonable timeframe for the purposes of

looking for solutions of private or administrative nature, able to prevent the failure. During

this early warning period, the competent authority should continue exercising its

competences, while liaising with the resolution authority in line with Article 30a. The

competent authority and the resolution authority should monitor, in close cooperation, the

evolution of the situation of the institution or entity and the implementation of alternative

measures. In this context, the resolution authority and the competent authority should meet

regularly, with a frequency set by the resolution authority.

If no appropriate alternative measure which would avert the failure is found or implemented

within this timeframe, the competent authority should assess whether the institution or entity

is failing or likely to fail. Where the competent authority concludes that the institution or

entity is failing or likely to fail, it should formally communicate this to the resolution

authority, following the procedure laid down in Article 32(1) and (2). The resolution authority

may also make this assessment itself, where the Member State has exercised the national

option provided in Article 32(2). The resolution authority should then determine whether the

conditions for resolution are met. Where the public interest assessment results in the need to

resolve the institution or entity, the resolution authority should subsequently adopt a decision

taking resolution action. This is in line with the recent case law of the Court of Justice of the

EU related to a case taking place in the Banking Union, according to which the ECB’s

assessment is a preparatory measure designed to allow the SRB to take a decision regarding

the resolution of a bank. The Court further stated that the SRB has the exclusive power to

assess the conditions required for the application of resolution action, subject to the

endorsement of the resolution scheme by the Commission and, where applicable, non-

objection by the Council

Public interest assessment

The CMDI framework was designed to avert and manage the failure of institutions of any size

while protecting depositors and taxpayers. When a bank is considered failing or likely to fail

and there is a public interest in resolving it, the resolution authorities will intervene by using

the tools and powers granted by the BRRD in absence of a private solution. In the absence of

a public interest for resolution, the bank failure should be handled through national orderly

winding up proceedings carried out by national authorities, potentially with financing from

the DGS or other funding sources, as appropriate.

In essence, the public interest assessment (PIA) compares resolution against insolvency, in

particular assessing how each scenario achieves the resolution objectives. The resolution

objectives against which the assessment is made includes: (i) the impact on financial stability

(a wide-spread crisis may result in a different outcome of the PIA than an idiosyncratic

Order of 6 May 2019, ABLV Bank/ECB, T-281/18, EU:T:2019:296, paragraphs 34 to 36, and

Judgment of 6 May 2021, ABLV Bank/ECB, C-551/19 P and C-552/19 P, EU:C:2021:369, paragraphs

62 to 71.

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failure); (ii) the assessment of the impact on the bank’s critical functions; and (iii) the need to

limit the use of extraordinary public financial support. Under the current framework,

resolution can only be chosen where insolvency would not allow achieving the resolution

objectives to the same extent.

The BRRD and SRMR leave margin of discretion to resolution authorities when carrying out

the PIA, which leads to divergent applications and interpretations that do not always fully

reflect the logic and intention of the legislation. In some cases, particularly within the

Banking Union, the PIA has been applied rather restrictively.

To minimise divergences and widen the application of the PIA, i.e. broadening the scope of

resolution, the proposal includes the following legislative amendments:

Amendments to the resolution objectives

The current definition of ‘critical functions’ does not include an explicit reference to the

impact of their disruption on the real economy and financial stability at a regional level,

leading to possible interpretation that functions may only be deemed critical when their

discontinuation has impacts at a national level. To avoid divergent interpretation, in the

definition of ‘critical functions’ reference is added to the ‘national or regional level’ of the

impact of the disturbance of their discontinuation to the real economy or to financial stability

(Article 2(1), point (35)).

The resolution objective requiring minimising the reliance on extraordinary public financial

support does not allow for a distinction between the use of national budget money and the use

of industry-funded safety nets (national resolution funds, SRF or DGSs). Therefore, this

resolution objective is amended to include a specific reference to support provided by the

budget of a Member State, to indicate that funding provided by the industry-funded safety

nets should be considered preferable to funding supported by taxpayers’ money (Article

31(1), point (c)). This is complemented with a change in the procedural rules on PIA,

requiring the resolution authority to consider and compare all extraordinary public financial

support that can reasonably be expected to be provided to the institution in resolution against

those in the insolvency counterfactual. If liquidation aid is expected in the insolvency

counterfactual, this should lead to a positive PIA outcome (Article 32(5), second

subparagraph).

The resolution objective related to depositor protection is amended to clarify that resolution

should aim at protecting depositors, while minimising losses for deposit guarantee schemes.

This means that resolution should be preferred if insolvency would be more costly for the

DGS.

Procedural changes to the comparison between resolution and national insolvency

proceedings

Under the current BRRD, resolution authorities are expected to choose insolvency unless

opting for resolution would better achieve the resolution objectives. The current text of

Article 32(5) provides that resolution shall only be chosen when winding up the institution

under normal insolvency proceedings would not meet the resolution objectives to the same

extent. To allow broadening the resolution application, Article 32(5), first subparagraph, is

amended to clarify that national insolvency proceedings should be selected as the preferred

strategy only when they achieve the framework’s objectives better than resolution (and not to

the same extent). While keeping insolvency as the default option, the amendment leads to an

increase in the burden of proof for resolution authorities in demonstrating that resolution is

not in the public interest. Nevertheless, the PIA will remain a case-by-case decision at the

discretion of the resolution authority.

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Use of DGS in resolution

A fundamental principle of the current resolution framework is that funding in resolution

should be first and foremost provided by the bank’s internal resources (its capital and other

liabilities, including certain categories of deposits), which are used to cover its losses. These

can be complemented by external sources of funding, namely (1) the resolution financing

arrangement – but only after 8% of the capital and liabilities of the bank have been used to

cover its losses – and (2) the DGS – in lieu of covered depositors up to the amount of losses

that they would have suffered (were it possible for them to be subject to losses in resolution).

For certain smaller and mid-sized banks, especially those primarily financed with deposits, it

can be very difficult to meet these requirements to access industry-financed external funding

without bailing-in deposits above the coverage level and those excluded from coverage.

However, in certain cases incurring losses on deposits can lead to widespread contagion and

financial instability, exacerbating the risks of broader banks runs, and thereby also have

serious adverse impact on the real economy.

Therefore, to ensure a higher degree of proportionality of the resolution framework, enhance

the application of transfer tools in resolution for smaller or medium-sized banks that will exit

the market, and facilitate DGS interventions in support of such tools where needed to prevent

depositors from bearing losses, Article 109 is amended to clarify certain aspects of the use of

DGS in resolution. The fundamental principle that the first line of defence in case of bank

distress should always be the banks’ internal loss absorption capacity, as well as the

conditions for access to the resolution financing arrangement, are preserved. In particular,

Article 109 clarifies that the DGS can be used to support transfer transactions that include

covered deposits, and, under certain conditions, also eligible deposits beyond the coverage

level and deposits excluded from the DGS guarantee. The DGS contribution should cover part

of or the entire difference between the value of the deposits transferred to a buyer or to a

bridge institution and the value of the transferred assets. Where a contribution is required by

the buyer as part of the transaction to ensure its capital neutrality and preserve compliance

with the buyer’s capital requirements, the DGS is also allowed to contribute to this effect.

To avoid depletion and ensure that the DGS has sufficient resources to maintain its functions,

the contribution of the DGS in resolution remains subject to certain limits.

On the one hand, Article 109(1) requires that any loss which the DGS may bear as a result of

an intervention in resolution does not exceed the loss that the DGS would bear in insolvency

if it paid out covered depositors and subrogated to their claims. This amount is determined by

the DGS on the basis of the least cost test, in accordance with the criteria and methodology set

out in DGSD for any possible use of DGS. These same criteria and methodology are also to

be used when determining the treatment that the DGS would have received had the institution

entered normal insolvency proceedings when carrying out the ex-post valuation under Article

74 for the purposes of assessing compliance with the ‘no creditor worse off’ principle and

determining whether any compensation is owed to the DGS.

On the other hand, the amount of the DGS contribution may not exceed any shortfall in the

value of the assets of the institution under resolution transferred to the buyer or the bridge

institution in comparison to the value of the transferred deposits and liabilities with the same

or a higher priority ranking in insolvency than those deposits. This is to ensure that the

contribution of the DGS is only used for the purposes of depositor protection, where

appropriate, and not for the protection of creditors that rank below deposits in insolvency.

Furthermore, it is clarified in Article 109(1) that the DGS can only contribute to a transaction

including all deposits if it is concluded by the resolution authority that the eligible deposits

exceeding the coverage level provided by the DGS, as well as the deposits excluded from

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coverage, should be protected from losses and cannot be bailed-in nor left in the residual

institution under resolution, which will be wound up. In particular, this would be the case

where the exclusion is strictly necessary and proportionate in order to preserve the continuity

of critical functions and core business lines or where necessary to avoid widespread contagion

and financial instability which could cause a serious disturbance to the economy of the Union

or of a Member State. To ensure access to resolution financing arrangements where necessary

for the implementation of a transfer strategy, paragraph 2b of Article 109 provides that the

DGS contributions in resolution should count towards the 8% total liabilities and own funds

(TLOF) requirement for accessing the resolution financing arrangement. If the contribution

made by shareholders and creditors of the institution under resolution through reductions,

write-down or conversion of their liabilities, summed with the contribution made by the DGS

amounts to at least 8% of the institution’s total liabilities including own funds, it will be

possible for the resolution authority to use the resolution financing arrangement to finance the

resolution action, which must lead to the failing institution’s exit from the market. To ensure

that MREL remains the first line of defence and to preserve level playing field, this should

only be possible for institutions for which the resolution plan or group resolution plan does

not provide for its winding up in an orderly manner in case of failure, given that the MREL of

these institutions has been set at a level that includes both the loss absorption as well as the

recapitalisation amounts.

The use of DGS funds enabling access to the resolution financing arrangements is not

expected to impact institutions’ incentives to comply with MREL. This is because the

incentives to comply with MREL are built into the governance of the framework. Resolution

authorities calibrate MREL requirements for all institutions with resolution strategies,

including smaller and mid-sized institutions where appropriate, according to the existing legal

provisions and address any failure to comply through several measures. Additionally,

institutions’ obligation to disclose publicly their MREL requirement and capacity, that will

start to apply in 2024 (as provided under the existing rules), will reinforce market discipline

and compliance. Moreover, the use of the DGS to facilitate access to the resolution financing

arrangement will be possible only for transfer strategies with market exit and on a case-by-

case basis where justified by resolution authorities. Therefore, since the failed institution will

exit the market after resolution should DGS funds be used, this mechanism de facto prevents

any advantage with regard to MREL calibration or the use of DGS funds compared to other

institutions that would continue operating after being restructured. Importantly, moral hazard

exists due to the possibility of subsidies outside resolution in the form of public funds in

insolvency. By allowing a more credible application of resolution through DGS use in

specific cases, the reform aims to disincentivise the recourse to taxpayer money, which may

affect market expectations ex ante, leading to more market discipline and decreasing the risk

of moral hazard. Finally, the use of the DGS contribution towards compliance with the 8%

TLOF threshold to access the resolution financing arrangements is restricted to those

institutions for which MREL has been set (i.e. institutions and entities that have not been

identified as liquidation entities) and includes both the loss absorption as well as the

recapitalisation components, in light of the fact that the respective resolution plan or group

resolution plan does not provide for their winding up in case of failure.

Depositor preference

Under the current wording of Article 108(1), BRRD creates a three-tier depositor preference

in the hierarchy of claims. It provides that covered deposits and DGS claims must have a so-

called ‘super-preference’ in the creditor ranking in the insolvency laws in each Member State

relative to non-covered preferred deposits (the part of eligible deposits from natural persons

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and SMEs exceeding the coverage level of EUR 100 000). The latter must rank above the

claims of ordinary unsecured creditors.

BRRD is presently silent on the ranking of the remaining deposits, that is, non-covered non-

preferred (i.e., corporate non-SME deposits exceeding the coverage level of EUR 100 000)

and excluded deposits (which, under the current framework include deposits of public

authorities, financial sector entities and pension funds). In most Member States, the non-

covered non-preferred deposits rank in insolvency alongside ordinary unsecured claims,

including senior debt instruments eligible for MREL (section A of figure below), while in a

minority of Member States, they already rank above ordinary unsecured claims (section B of

figure below).

The super-preference of the DGS in the current framework (i.e., its rank above claims of

depositors that are not covered) impacts the results of the least cost test in a way that the DGS

funds can almost never be used outside the payout of covered deposits in insolvency, because

the DGS would expect a full or very high recovery of the resources used to reimburse covered

deposits.

On the other hand, the lack of general depositor preference (i.e., the ranking of all deposits

above ordinary unsecured claims) in some Member States creates an unlevel playing field and

potential impediments to resolution in cross-border contexts and might lead to breaches of the

‘no creditor worse off’ principle, where, for financial stability reasons, it is necessary to

exclude non-covered deposits from bearing losses.

To facilitate the use of the DGS in resolution under the least cost test safeguard where this is

necessary to maintain financial stability and protect depositors, as well as to remove

impediments to resolution, Article 108(1) is amended to introduce a general depositor

preference with a single-tiered ranking. This would be achieved thanks to two modifications.

First, the legal preference in the insolvency laws of Member States required by BRRD relative

to ordinary unsecured claims is extended to include all deposits. This entails that all deposits,

including eligible deposits of large corporates and excluded deposits, rank above ordinary

unsecured claims. Second, the relative ranking between the different categories of deposits is

replaced by a single-tier depositor preference, where the super-preference of the DGS/covered

deposits is removed, and where all deposits rank pari passu (i.e., at the same level amongst

themselves) and above ordinary unsecured claims.

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Stylised view of creditor hierarchy in insolvency under the current framework (three-tier

depositor preference) and under the proposed reform (single-tier general depositor

preference)

Source: Commission staff.

As shown by the impact assessment, a single-tier depositor preference would not impinge on

the protection currently enjoyed by covered depositors, who are always insured under the

DGSD in case their accounts become unavailable and are mandatorily excluded from bearing

losses in resolution (Article 44(2) BRRD). The higher preferred ranking of the DGS claims

protects instead the banking industry, which pays contributions to the DGS. Nevertheless,

from the perspective of the banking industry itself, the higher priority of the DGS does not

necessarily lead to less frequent need for replenishment of the DGS given that the result of

this higher priority would be more frequent use of DGS resources for payout than for transfer

strategies in resolution. This is so because a payout requires using the DGS available financial

means to cover the gross amount of covered deposits, and there is a time lag between the

payout and recovery in sometimes lengthy insolvency procedures, as well as a loss on the

franchise value of assets.

Additionally, regarding the argument of cost-efficiency associated with the use of DGS funds

in resolution compared to the cost of payout of covered deposits in insolvency, empirical

evidence referenced in the impact assessment

shows that paying out covered deposits can

quickly deplete the financial means of the DGS (even when fully-filled) or that, in some

cases, the DGS financial means cannot sustain a payout event when the amount of covered

deposits is significant. In this regard, the CMDI review aims to enable cheaper, more cost-

efficient alternative uses of the DGS in resolution, when compared to the cost of DGS payout

in insolvency, to support a transfer of assets and liabilities (including deposits) followed by

ECB (October 2022), Protecting depositors and saving money - why DGS in the EU should be able to

support transfers of assets and liabilities when a bank fails.

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market exit. See the impact assessment for a comprehensive analysis (including by the EBA

in its reply to the Commission’s call for advice from October 2021).

Conditions for providing extraordinary public financial support

In order to ensure that public funds in the form of extraordinary public financial support are

not used to support institutions or entities that are not financially viable, it is necessary to

provide for strict conditions on when such support can be provided and what form it can take.

The existing rules provide for certain limitations but are not sufficiently precise.

Extraordinary public financial support outside of resolution should be limited to cases of

precautionary recapitalisation, preventive measures of DGS aimed at preserving the financial

soundness and long-term viability of credit institutions, measures taken by DGS to preserve

the access of depositors and other forms of support granted in the context of winding up

proceedings. Providing extraordinary public financial support in any other situations outside

of resolution should not be permitted and should result in the receiving institution or entity

being considered as failing or likely fail.

Precautionary recapitalisation

Particular attention must be paid to the extraordinary public financial support granted in the

form of precautionary recapitalisation. It is necessary to lay down more clearly the

permissible forms of precautionary measures provided outside of resolution and aimed at

recapitalising the entity concerned. The measures granted should be temporary in nature

because they are supposed to address adverse consequences of external shocks and not used to

compensate for intrinsic weaknesses linked, for example, to an outdated business model. Use

of perpetual instruments, such as Common Equity Tier 1, should become exceptional and

possible only if other forms of capital instruments would not be adequate. Such change is

necessary to ensure that the support remains temporary in nature. Stronger and more explicit

requirements on determining in advance the duration and exit strategy for the precautionary

measures are also needed. The entity receiving support should be solvent at the time the

measures are applied, i.e. assessed by the competent authority as not being in breach and not

likely to breach the applicable capital requirements in the next 12 months. If the conditions

under which the support is granted are not adhered to, the entity receiving the support should

be considered as failing or likely to fail.

Article 32b and market exit

Regardless of a potential expansion of the application of resolution, the resolution of some EU

banks will not be in the public interest. In such cases banks should be wound up in accordance

with national law. The applicable national rules are very heterogeneous across EU Member

States, both in terms of the conditions which trigger the initiation of a procedure, and the

structure of the procedure itself. In some Member States, the bank would go into normal

insolvency, in others a special insolvency or liquidation regime for banks exists or there are

several procedures available, not necessarily leading in all cases to the exit of the bank from

the market. Furthermore, the triggers for commencing national insolvency proceedings are not

always aligned with the failing or likely to fail determination under the BRRD. This can

create uncertainty as to whether insolvency proceedings can start (so called “limbo

situations”) or whether the procedure leads to a clear outcome in terms of ensuring exit from

the market.

To address such situations, the 2019 Banking Package introduced Article 32b, requiring

Member States to ensure the orderly winding up in accordance with the applicable national

law of failing banks, which are not resolved due to a negative PIA. However, the

implementation of this provisions in national legal frameworks is not sufficient to address all

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residual risks of failing institutions not exiting the market. In particular, there is still

uncertainty as to which procedure should apply in these cases, and particularly whether only

normal insolvency proceedings should apply or whether any other national procedures could

also apply.

Therefore, to resolve the existing inconsistency and uncertainty across Member States, Article

32b is amended to provide further framing and clarity, and to ensure that applicable national

procedures lead to the market exit of the bank within a reasonable timeframe. The

amendments neither aim at, nor lead to harmonisation of national insolvency rules, and a

margin at national level is preserved as to how this market exit should occur (i.e., whether

through a sale or otherwise).

In this context, it is also proposed to further enhance the role of the withdrawal of the bank’s

license when failing or likely to fail is declared, and no resolution ensues. The new provision

of Article 32b(3) empowers the supervisor to withdraw the license solely based on the failing

or likely to fail determination, which on its turn shall be a sufficient condition for relevant

national administrative or judicial authorities to initiate without delay the applicable national

winding-up procedure.

Amendments related to the minimum requirement for own funds and eligible liabilities

(MREL)

MREL for transfer strategies

As part of resolution planning, resolution authorities are defining the preferred and variant

resolution strategies and preparing the application of the relevant tools to ensure their

effective execution. For large and complex institutions, open-bank bail-in is, in general,

expected to be the preferred resolution tool, implying the write-down and conversion of own

funds and eligible liabilities to absorb losses and recapitalise the bank emerging from

resolution.

In parallel, certain smaller and medium-sized institutions with business models based

predominantly on funding through equity and deposits may be candidates for transfer tool

strategies which involve selling parts or all of the business to a purchaser or a bridge

institution, transferring non-performing assets to an asset management vehicle, and market

exit.

As already provided under the current framework, the level of the MREL requirement should

reflect the preferred resolution strategy. The existing provision of Article 45c focuses on

MREL calibration for bail-in strategies (requirement for loss absorption and recapitalisation

amount, with detailed rules on how each should be adjusted, and on subordination

requirements mostly geared towards ensuring compliance with the 8% TLOF requirement).

While acknowledging the possibility to use resolution tools other than bail-in, the current

BRRD does not regulate in detail MREL calibration for transfer strategies. In practice, this

leads to legal uncertainty and divergent methodologies applied by resolution authorities when

setting MREL for such strategies.

It is therefore necessary to provide a clearer legal basis for distinguishing MREL calibration

for transfer strategies from the one for bail-in, also for the sake of proportionality and

consistent application. In this respect, and taking into account also current practices of

resolution authorities, a new Article 45ca is added which sets out the principles which should

be considered when calibrating MREL for transfer strategies - size, business model, risk

profile, transferability analysis, marketability, whether the strategy is asset transfer or share

deal and complementary use of asset management vehicle for assets which cannot be

transferred.

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The amendments reinforce the principle that MREL should remain the first and main line of

defence for all banks, including for those that will be subject to a transfer strategy and market

exit, to ensure that losses are absorbed to the maximum extent possible by shareholders and

creditors.

Estimating the combined buffer requirement in case of prohibition of certain distributions

To address an existing gap in legal clarity of the current framework with respect to the power

of the resolution authorities to prohibit certain distributions in case of failure of an entity to

meet the combined buffer requirement in addition to its MREL, and in particular where the

entity is not subject to the combined buffer requirement (under Article 104a of Directive

2013/36/EU) on the same basis as its MREL, a new paragraph 7 is added to Article 16a to

clarify that the power to prohibit certain distributions should be applied on the basis of the

estimation of the combined buffer requirement resulting from the delegated act under Article

45c(4) that specifies the methodology to be used by resolution authorities to estimate the

combined buffer requirement in such circumstances.

De minimis exemption from certain MREL requirements

Under the MREL rules in BRRD, structurally subordinated liabilities referred to in Article

72b(2)(d)(iii) CRR are captured by the definition of ‘subordinated eligible instruments’ used

throughout Article 45b BRRD. However, liabilities that are permitted to be eligible in CRR

under the de minimis exemption in Article 72b(4) CRR do not qualify as ‘subordinated

eligible instruments’ under BRRD because paragraph 4 of Article 72b CRR is explicitly

excluded from the definition in Article 2(1), point (71b), of BRRD.

To correct this inconsistency, a new paragraph is added to Article 45b BRRD, allowing

resolution authorities to permit resolution entities to comply with the MREL subordination

requirements using senior liabilities when the conditions in Article 72b(4) CRR are met.

To ensure alignment with the TLAC framework, resolution entities benefitting from the de

minimis exemption may not have their MREL subordination requirement adjusted downwards

by an amount equivalent to the 3.5% TREA allowance for TLAC pursuant to the second

sentence of the first subparagraph of Article 45b(4) BRRD.

Contingent liabilities

The proposal also introduces clarifications regarding the status of contingent liabilities and

provisions for the purposes of resolution planning and execution. The amendments take in to

account the International Accounting Standards Board’s (IASB) International Accounting

Standard (IFRS) 37 ‘Provisions, Contingent Liabilities and Contingent Assets’ and introduce

references to (i) provisions (liabilities of uncertain timing or amount) and (ii) contingent

liabilities (possible obligations depending on whether some uncertain future event occurs, or

present obligations for which payment is not probable or the amount cannot be measured

reliably). The two categories differ from the perspective of the degree of likelihood of a

payment having to be made and provisions should be treated as liabilities whereas contingent

liabilities would not be treated as such. From a resolution perspective this means that

provisions which have been recognised should, in principle, be bail-inable while contingent

liabilities are unlikely to be bailed in given their uncertain nature.

Contributions and irrevocable payment commitments

To take into account the end of the initial period for the build-up of the resolution financing

arrangements and the ensuing reduction in the amount of regular ex ante contributions,

technical amendments are made to Articles 102 and 104 to disconnect the maximum amount

of ex post contributions that may be raised from the amount of the regular ex ante

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contributions, thus avoiding a disproportionately low cap on ex post contributions, as well as

to allow for a deferral of the collection of the regular ex ante contributions in case the cost of

an annual collection would not be proportionate to the amount to be raised. The treatment of

irrevocable payment commitments is also clarified in Article 103, both as regards their use in

resolution and as regards the procedure to follow in case an institution or entity ceases to be

subject to the obligation to pay contributions.

In addition, to provide more transparency and certainty with respect to the share of

irrevocable payment commitments in the total amount of ex ante contributions to be raised, it

is clarified that resolution authorities should determine such share on an annual basis, subject

to the applicable limits.

Mandates for the EBA

Resolution authorities have in the past years developed and implemented a wide set of

policies to improve banks’ resolvability and ensure an adequate level of preparation in the

implementation of resolution tools and powers in the event of resolution. The EBA has

developed common standards to supplement the provisions set out in BRRD and harmonise

authorities’ practices across the Union.

To ensure that the applicable standards remain fit for purpose, and that new ones are adopted

where appropriate, new roles and responsibilities are given to the EBA to report on the

existing practices, foster convergence and promote a high level of preparedness among the

competent and resolution authorities. New mandates are introduced for the EBA to monitor

the actions taken by resolution authorities to ensure an effective implementation of the

framework and assess possible divergences among Member States in the areas of resolvability

assessments and the operationalisation of resolution tools and powers. In addition, a new role

for EBA is introduced to foster convergence and exchanges between competent and resolution

authorities through the coordination of Union-wide exercises to test the application of the

framework, in recovery and resolution.

Moreover, in light of the multiple national options available to Member States under Article

44a, EBA is asked to report on the application of that article, comparing the way it has been

implemented in the Member States and analysing the impact of any divergences on cross-

border operations.

Finally, as institutions and entities may be required to comply with internal MREL either on

an individual or consolidated basis, practice has shown that, in some situations, the additional

own funds requirements and the combined buffer requirement provided in CRD are not set on

the same basis as the internal MREL. For this reason, the existing regulatory technical

standards on the estimation of the additional own funds requirements and the combined buffer

requirement, which have been adopted through Commission Delegated Regulation (EU)

2021/1118

, should be expanded to capture not just resolution entities but also entities that

have not been identified as resolution entities. The EBA mandate in Article 45c(4) is amended

accordingly.

Commission Delegated Regulation (EU) 2021/1118 of 26 March 2021 supplementing Directive

2014/59/EU of the European Parliament and of the Council with regard to regulatory technical

standards specifying the methodology to be used by resolution authorities to estimate the requirement

referred to in Article 104a of Directive 2013/36/EU of the European Parliament and of the Council and

the combined buffer requirement for resolution entities at the resolution group consolidated level where

the resolution group is not subject to those requirements under that Directive (OJ L 241, 8.7.2021, p. 1).

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Other provisions

To reduce the administrative burden on institutions as regards obligations to update recovery

plans on an annual basis, a third subparagraph is added to Article 5, paragraph 2, which

provides that supervisors shall have the discretion to waive the requirement to update certain

parts of the plan for a given cycle in the absence of any changes to the legal or organisational

structure of the institution, its business or its financial situation.

Under the current text of the BRRD, recovery plans shall not assume any access to or receipt

of extraordinary public financial support. The rule in Article 5, paragraph 3 is supplemented

to provide that, in addition to public financial support, recovery plans shall not assume access

to or receipt of central bank emergency liquidity assistance or any central bank liquidity

assistance provided under non-standard collateralisation, tenor and interest rate terms.

Resolution authorities are required to identify measures to be taken with respect to group

entities when drafting group resolution plans. The intensity and level of detail of this work

with respect to subsidiaries that are not resolution entities may vary depending on the size and

risk profile of the institutions and entities concerned, the presence of critical functions and the

group resolution strategy. BRRD is thus amended with the introduction of a new

subparagraph in Article 12(1), which will allow resolution authorities to follow a simplified

approach, where appropriate, when carrying out this task.

Clarifications to Article 44(7)

The current provision of Article 44(7) is unclear as to what are the condition and the sequence

of use of the resolution financing arrangement and alternative financing sources after the

provision of initial financing of up to the 5 % TLOF limit and after all unsecured, non-

preferred liabilities, other than eligible deposits, have been written down or converted in full.

Therefore, paragraph 7 of Article 44 is amended to provide legal clarity and additional

flexibility to use the RF beyond the 5% TLOF.

Resolution colleges

To ensure alignment with Article 51(3) of Directive (EU) 2013/36 which provides for the

establishment of colleges of supervisors by the competent authorities supervising an

institution with significant branches in other Member States to facilitate the cooperation and

exchange of information between the home and host supervisors, a new paragraph 6a is added

to Article 88 BRRD which provides for the setting up of resolution colleges in these cases to

facilitate the cooperation and exchange of information between the home and host resolution

authorities.

Ranking of resolution financing arrangements’ claims

Article 37(7) provides that the resolution financing arrangement should be able to recover any

reasonable expenses properly incurred in connection with the use of resolution tools and

powers from the institution under resolution as a preferred creditor. However, BRRD did not

specify the relative ranking of the resolution financing arrangement to other preferred

creditors. The new paragraph 9 added to Article 108 clarifies that those claims of the

resolution financing arrangement should rank above the claims of depositors and of DGSs.

Additionally, the resolution financing arrangement can be further used in resolution for the

purposes identified in Article 101. So far, BRRD has not specified whether such use creates a

claim in favour of the resolution financing arrangement and, if so, on the insolvency ranking

of such claim. A new paragraph 8 is added in Article 108 specifying that, where the activity of

the institution under resolution is partially transferred to a bridge institution or a private

purchaser with the support of the resolution financing arrangement, it should have a claim

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against the residual entity. The existence of such claim should be assessed on a case-by-case

basis, depending on the resolution strategy and the way in which the resolution financing

arrangement was concretely used, but it should be connected to the use of the resolution

financing arrangement to bear losses in lieu of creditors, such as when the arrangement is

used to guarantee assets and liabilities transferred to a recipient or to cover the difference

between the transferred assets and liabilities.

Where the resolution financing arrangement is used to support the application of the bail-in

tool as the primary resolution strategy (Article 43(2), point (a)), in lieu of the write down and

conversion of the liabilities of certain creditors, this should not generate a claim against the

institution under resolution, as it would eliminate the purpose of the resolution financing

arrangement’s contribution. Compensations paid due to the breach of the ‘no creditor worse

off’ principle should likewise not generate a claim in favour of the resolution financing

arrangement.

Information exchange

Article 128 is amended to allow the Single Resolution Board, the ECB and other members of

the European System of Central Banks, the EBA, the resolution authorities and competent

authorities to provide the Commission with all information necessary for the performance of

its tasks related to policy development.

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2023/0112 (COD)

Proposal for a

DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL

amending Directive 2014/59/EU as regards early intervention measures, conditions for

resolution and financing of resolution action

(Text with EEA relevance)

THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning of the European Union, and in particular

Article 114 thereof,

Having regard to the proposal from the European Commission,

After transmission of the draft legislative act to the national parliaments,

Having regard to the opinion of the European Central Bank

Having regard to the opinion of the European Economic and Social Committee

Acting in accordance with the ordinary legislative procedure,

Whereas:

(1) The Union resolution framework for credit institutions and investment firms

(‘institutions’) was established in the aftermath of the 2008-2009 global financial

crisis and following the internationally endorsed Key Attributes of Effective

Resolution Regimes for Financial Institutions

of the Financial Stability Board. The

Union resolution framework consists of Directive 2014/59/EU of the European

Parliament and of the Council

and Regulation (EU) No 806/2014 of the European

Parliament and of the Council

.Both acts apply to institutions established in the

Union, and to any other entity that falls under the scope of that Directive or of that

Regulation (‘entities’). The Union resolution framework aims at dealing in an orderly

manner with the failure of institutions and entities by preserving institutions and

entities’ critical functions and avoiding threats to financial stability, and at the same

time protecting depositors and public funds. In addition, the Union resolution

OJ C , , p. .

Financial Stability Board, Key Attributes of Effective Resolution Regimes for Financial Institutions, 15

October 2014.