Speech by John Berrigan at the SRB/SSM seminar on the crisis management and deposit insurance (CMDI)

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Good morning to all here in the SRB premises and on-line.

Thank you Susan for the introduction. And thanks to both Dominique and Andrea for their invitation to speak here today.

This is an important seminar, addressing a key topic of relevance to the EU banking sector.

The seminar brings together the key partners in operating the EU bank resolution framework to discuss the Commission’s most recent proposal for reform. This is, of course, the crisis management and deposit insurance – or CMDI - proposal.

I should acknowledge upfront that the SSM and SRB have co-operated closely in preparing this proposal. And we in the Commission are grateful for that co-operation.

Beyond that, we have consulted stakeholders extensively when drafting the proposal. Hopefully, we have addressed most of the concerns expressed in those consultations – although I am certain not all!

Most of all today is an opportunity to discuss what you in the seminar think works well and maybe not quite so well in the proposal. In fact, I feel a bit like a student waiting for his homework to be marked!

I want to say a few words of background to the proposal. The EU banking sector has come a long way since the global financial crisis in 2008/9. Our banks are much stronger and more resilient – as evident in the recent EBA/SSM stress tests.

This is to a very large extent due to extensive reform of the EU regulatory framework for prudential oversight and crisis management. It is also due to profound changes in the institutional architecture of the banking union – reflected not least in the fact that this seminar today is being co-organised by two institutions created for the banking union, the SRB and the SSM.

All these improvements allow us to prevent and manage bank crises much more effectively than 15 years ago. We have a lot to be satisfied about.

But if so, why did we put the CMDI proposal forward?

We certainly didn’t do it for the enjoyment – as my team and others in this room who have worked on any banking union file will be happy to tell you. Progress in completing banking union is hard-earned!

We proposed the CMDI reform, because our resolution framework works well in theory but does not fully function as intended. Actual experience since 2015 has revealed, a pervasive reluctance to use the resolution framework as it now stands. We have only used it once in all that time.

We needed to understand why this is the case and adjust the framework accordingly – all the time without throwing the baby out with the bathwater.

In that sense, I want to be clear today that we see the CMDI proposal as an evolution – not a revolution – in the existing framework. Some significant adjustments are proposed. But none of the fundamentals are compromised.

Most importantly, the two fundamental objectives of what we might now call the post- great financial crisis bank resolution doctrine – safeguarding financial stability and protecting taxpayers – are fully preserved. In fact, we believe this proposal reinforces them.

The proposal has been under preparation for many years, as one of the four pillars of the so-called banking union roadmap. It is somewhat different from the other three pillars, insofar as it is less about creating something new in the banking union and more about reinforcing an existing element of the banking union.

On the other hand, it is very similar to the other pillars in its technical complexity and political sensitivity.

It may have looked “oven-ready” when adopted earlier this year. But I can assure that a great deal of mixing and remixing of ingredients went on in the years beforehand.

And here, I want to take the opportunity of this seminar to pay tribute publicly to my great CMDI team in Directorate General for Financial Stability, Financial Services and Capital Markets Union (DG FISMA) – present and past – for all the “blood, sweat and tears” that have gone into this proposal.

At a more political level, the proposal has been informed by deliberations in the Eurogroup and the now famous – at least in our little bubble – statement of July 2022. That statement, which reflects a finely balanced compromise between national interests, is perhaps inevitably not always crystal clear.

But the Commission was always crystal clear that we would produce a CMDI proposal that was both ambitious and internally coherent. I hope you can all agree that at least we have done that.

Adoption of the CMDI proposal in by the College in April coincided with the failures of several banks in the United States, and of a globally systemic bank in Switzerland. These events have given rise to many “lessons to be learned” discussions about the implementation of international standards on banking regulation, supervision, and crisis management after the great financial crisis.

Our proposal was certainly not meant as a response to those lessons learned. But these most recent bank failures were a timely reminder of a much more general lesson learned since the great financial crisis – that is we must have in place the most effective possible arrangements to deal with all troubled banks, whatever their size and circumstances.

Here in the EU, we have too often seen the failures of medium-sized and smaller banks being managed outside the harmonised resolution framework. And often by using taxpayers’ money, instead of banks’ loss absorption capacity and industry-funded safety nets.

The CMDI proposal we put forward aims to address this phenomenon along three main axes

• Ensuring that more banks can be resolved via appropriate use of the public interest assessment. But this certainly does not mean that all banks must and will be resolved
   
• Providing resolution authorities with the necessary discretion and the right set of tools to handle the full spectrum of banks if they are failing or likely to fail and
   
• Making adequate funding available to ensure that these tools can be applied credibly to any bank, where – based on a least-cost analysis - resolution protects financial stability, depositor confidence and taxpayers’ money better than liquidation

As the proposal is a coherent whole, we see all these elements as equally important. But there is no doubt that the funding aspects are the most controversial and so are the subject of particular attention in the co-legislation process.

Controversial or not, we must get these funding aspects right. Without appropriate funding possibilities, the other elements of the proposal would not have the desired effect. Indeed, an extension of resolution to more banks without appropriate funding could even increase current problems with the framework.

So, I will say a just few words specifically on these funding aspects of the proposal.

Incentives to use resolution have often been distorted because of the difficulties in bailing-in uncovered depositors when this would be needed to access resolution funds. Why?

Because, imposing losses on such depositors - even the prospect of imposing such losses - comes with a high risk of undermining depositor confidence and threatening financial stability through contagion risks. This tension was again evident in the bank crises earlier this year, in the US in particular.

Banks’ internal resources (MREL) should, of course, remain the first line of defence. Shareholders and creditors should be the first ones to absorb losses in a failing bank.

But we also need to be prepared for tail events, when bailing in shareholders and creditors may turn out to be insufficient to fund a successful resolution, while liquidation of the bank would be more costly and disruptive.

This is why the CMDI proposal allows Deposit Guarantee Schemes to contribute to the funding needed to transfer all deposits – insured as well as uninsured – from a failing bank to third party or a bridge bank.

This ‘bridge mechanism' can be a more efficient and cheaper way to deal with a bank crisis and protect depositors, instead of paying them after the bank has failed. But let me stress: the use of the ‘bridge’ would come with safeguards.

For instance, this ‘bridge mechanism’ would only be applicable to banks whose resolution will lead to an exit of the market - it will not be used when banks are restructured in resolution. And let us recall that resolution authorities will keep the possibility, if they deem it appropriate, to impose losses on uncovered deposits.

Ultimately, the question is: who should pay when the bank fails, and all the available loss absorbing resources have been exhausted? Should it be taxpayers? We think not. Should it be depositors? Experience suggests, resolution authorities often think not. What is left is there for, the industry safety nets.

One thing is clear: taxpayers should not be on the hook anymore. And, depending on the circumstances, bailing in uncovered depositors may or may not be appropriate.

If this is the case, we need to ensure that EU authorities have the necessary flexibility to use industry-funded safety nets to deal with such cases. This may be the most cost-effective way to handle a crisis. Preserving value instead of destroying it. And using Deposit Guarantee Schemes in the way that depletes them the least.

This is precisely what the funding aspects of the CMDI proposal imply. The aim is to enhance the use of industry-funded safety nets, so as to shield depositors from losses where needed, and as a complement to solid internal loss-absorbing capacities that remain the first line of defence.

So, I repeat what I said earlier: none of the fundamentals of the resolution framework has been compromised here.

Before concluding, let me say a few words about where we are in the co-legislation process.

Draft reports on each of the proposals that make up the CMDI package have been recently published by the respective rapporteurs in the European Parliament. And the Council is also making good progress under the Spanish Presidency.

We in the Commission are supporting the co-legislators in their work. And we look forward to the finalisation of their mandates in the coming months and the start of the trilogues.

With this proposal, we are moving a step closer to achieving our long-term goal of completing the banking union.

I am hopeful that once agreement on the package has been reached in co-legislation, it will pave the way for creation of the European Deposit Insurance Scheme and for a facility in liquidity and resolution and help us provide an even more secure, efficient, and stable banking market for the EU and its citizens. But today is not about hoping, it’s about discussing what is on the table today: the CMDI proposal.

I wish you all a very interesting and successful seminar. Thank you all for your attention.

Related links

Reform of bank crisis management and deposit insurance framework

Banking union