The European Parliament has definitively approved the reform of the framework for the management of banking crises and the protection of deposits, with the aim of making the exit from the market of institutions in difficulty more orderly, strengthening the protection of savers and minimizing the use of public funds.
The new package intervenes on three regulatory pillars (the Bank Recovery and Resolution Directive (BRRD), the Single Resolution Mechanism Regulation (SRMR) and the Deposit Guarantee Schemes Directive (DGSD) – introducing clearer rules on when and how to intervene, expanding the number of banks that can be managed in resolution and allowing, in specific cases, the use of sector funds to facilitate the process.
The central mechanism of the reform is the so-called “Bridge the Gap”: a tool that allows medium-sized and small banks to access sectoral funds (fed by the banking industry itself and not by taxpayers) to cover the gap between what the bank is able to absorb with its own resources and what is needed to initiate an orderly exit procedure from the market.
Protected deposits are strengthened, the reimbursement hierarchy redesigned, and protection extended to new categories of account holders. “The reform represents a decisive improvement, making the resolution more credible and accessible for small and medium-sized banks, while maintaining a prudent approach in which the ability to absorb losses remains the first line of defense”, claimed Irene Tinagli of the Democratic Party, rapporteur for the Srmr.
More banks under resolution
The reform significantly extends the scope of application of resolution procedures, i.e. the tools that allow the failure of a bank to be managed without interrupting essential services. In the past, these procedures were mainly used for large institutions. They can now also be applied to small and medium-sized banks, if this is deemed to be in the public interest.
“It extends the resolution system, in particular to small and medium-sized banks, improves predictability and harmonizes the use of tools across the Union. It also strengthens protections for citizens, SMEs and municipalities, clarifying how their funds will be treated in the event of a bank failure”, declared the rapporteur for the BRRD, the Czech MP Luděk Niedermayer.
From a legal point of view, ‘resolution’ is an alternative to ordinary liquidation: it allows the authorities to intervene before the failure produces systemic effects, keeping critical functions such as payments and deposits active. In simpler terms, it means avoiding chaotic closures that risk infecting other banks or the local economy.
The new legislation also clarifies the criteria for assessing “public interest”, explicitly including the impact at a regional and not just national level. This makes the initiation of resolution more likely than liquidation in cases where a bank, although small, is relevant for a territory.
Stop bailouts with public money
“One of the main objectives was to reduce the use of taxpayers’ money by promoting market solutions and private financing mechanisms,” Niedermayer further explained. “The cost of bank failures should be borne mainly by shareholders and creditors”, claims the text, which establishes that only in exceptional cases, and with very stringent conditions, will public support be able to intervene.
The underlying technical mechanism is that of loss absorption capacity, guaranteed by specific financial instruments that banks must hold (the minimum requirement for own funds and eligible liabilities, defined in the resolution plans). If these resources are not enough, funds financed by the banking sector itself, such as resolution funds or deposit guarantee schemes, could be used.
In this way, in the event of bankruptcy, investors will pay first, then resources from the banks will eventually intervene, and only in the last resort will the State. The goal is to avoid what happened during the global financial crisis of 2008, when numerous credit institutions were saved with massive public interventions to avoid the collapse of the system. In many European countries and the United States, governments intervened with recapitalizations, guarantees and acquisitions, effectively transferring losses generated by the private sector onto the public budget.
“The main objectives of the review have been achieved. The scope of the resolution has been broadened, while ensuring sufficient safeguards so that deposit guarantee schemes remain adequately funded. At the same time, we have harmonized the instruments of deposit guarantee schemes, moving towards a more integrated European banking sector,” said Danish Green Kira Marie Peter-Hansen, rapporteur for the DGSD.
The “bridge the gap” mechanism
One of the central innovations is the so-called “bridge the gap” mechanism, which allows deposit guarantee funds to be used to bridge the gap between losses and available internal resources in the failing bank.
From a technical point of view, these funds can help reach the minimum threshold of 8 percent of losses that must be absorbed before accessing resolution funds. This step is crucial to activate European tools such as the Single Resolution Fund.
This means that if a bank does not have enough capital or instruments to absorb losses, part of the guarantee funds can be used to prevent the crisis from being passed on to depositors or the State. However, the system remains subject to strict conditions.
Guarantee funds
Deposit guarantee funds are mandatory systems financed by banks to protect savers in the event of an institution’s failure. Each bank must join and pay contributions to this fund, which intervenes if the bank is no longer able to return the deposits. Standard protection covers up to 100 thousand euros per person and per bank, repaid quickly. With the new rules, these funds can also be used preventively, for example to facilitate the restructuring or sale of a bank in crisis, avoiding more serious effects on the system and guaranteeing customers access to their money.
More protected deposits
The reform introduces a more defined hierarchy in the repayment of funds in the event of bankruptcy. Deposit guarantee schemes will have priority in recovering sums paid, followed by retail depositors, small and medium-sized enterprises and some public authorities.
Furthermore, deposit protection itself is strengthened. In addition to the standard threshold of 100 thousand euros per person and per bank, some accounts linked to specific operations, such as the sale of properties, may be covered up to amounts between 500 thousand and 2.5 million euros.
The general principle is that of “depositors’ preference”, which gives savings a higher rank than other credits. According to the regulatory text, this choice “will help strengthen depositors’ confidence and prevent the risk of bank runs”.
Responsible managers: bonuses are returned
The reform also introduces a rule of individual responsibility which directly concerns the top management of banks in crisis. Variable compensation, including bonuses and discretionary pensions, of members of the board of directors and senior management that has not yet been paid at the time of the decision to initiate resolution is automatically forfeited.
Those already paid in the previous 24 months must be returned, unless those directly involved demonstrate that they did not participate or contribute to the conduct that led to the bankruptcy of the bank. The rule does not apply to variable components of remuneration regulated by collective agreements.
More timely and coordinated interventions
The reform also strengthens early intervention measures. The authorities will be able to act before a bank’s situation becomes irreversible, with clearer tools and better defined conditions.
Among the new features, the possibility of imposing plans for a gradual exit from the market or replacing the top management of the institute. Coordination between supervisors and resolution authorities is also improved to ensure rapid decisions. This means there will be fewer delays, less uncertainty and a greater likelihood of avoiding messy crises.
