On 31 August, ESBG shared its feedback with the European Commission on the legislative package which aims to review the Crisis Management and Deposit Insurance (CMDI) framework, including four legislative texts (SRMR, BRRD, DGSD and the Daisy Chain proposal). While ESBG members recognize the need to enhance and to strengthen the current framework, they oppose the review overall for the following reasons:

-Resolution scope: The EU Commission proposed to extend the resolution scope through a revision of the Public Interest Assessment (PIA) to ensure that resolution tools can also be applied to small and medium sized banks. However, ESBG thinks that this proposal will increases the administrative burden for those institutions, which were classified as “liquidation entities” up until now. In addition, the associated increase in capital requirements (MREL) could also have a negative impact on lending opportunities on a local scale. That is why ESBG rejects the reference to “regional level” within the definition of critical functions, as well as the reversal of the principle after that.

-Funding in resolution: ESBG disagrees with the EU Commission’s proposal to strengthen funding in resolution by complementing the internal loss-absorbing capacity of institutions, with the use of DGS funds in order to facilitate the access to the Single Resolution Fund (SRF). ESBG members fear that the potentially wider used industry-funded safety nets (DGS and resolution funds) and the extension of the deposit protection (public entities, client funds held by non-bank financial institutions) would cause disproportionate additional contributions which could threaten the profitability of the European banks compared to their international peers.

-Liquidity in resolution: Considering that the current safety nets might not be able to provide sufficient liquidity in resolution if several banks or a G-SIB faced liquidity crisis, they could usefully be complemented with a liquidity-in-resolution tool. Such a tool, would contribute to ensure an effective and credible overall EU crisis management framework, avoiding unwarranted or increasing ex-ante contributions to existing resources.

-DSG alternative and preventive measures: Although they are maintained in the amended framework, the new requirements are very time-consuming, especially for the preventive measures which are neither credibly, functional nor feasible in the future. ESBG cannot understand why proven preventive measures should be restricted in the future.

-General depositor preference: Regarding the Commission’s proposal to amend the hierarchy of claims with the introduction a single tiered ranking of all deposits, ESBG emphasizes that unsecured creditors in resolution/liquidation may bear losses before corporate deposits, compared to today when both bear losses at the same time.

Executive SummaryFull Position Paper

Christophe Hennebelle
Advisor- Recovery, Resolution And Deposit Insurance Policy
t.:+32 2 211 11 62