By Christian van Beek, Director, Financial Institutions

The proposals are aimed at ensuring a more consistent approach to bank resolution, allowing for an orderly exit of banks; preserving financial stability; protecting taxpayers' money; shielding the economy from the effects of bank failures; and improving depositor protection.

A key aim is to strengthen the resolution framework for small and medium-sized banks in terms of its design and implementation and to create better incentives for its application. Policymakers also want to create a more coherent application of the rules around depositor protection as well as a more level playing field in order to solidify depositor confidence hence prevent contagion and safeguard financial stability.

Scope welcomes the proposal as the short-lived financial crisis in March this year demonstrated how rapid intervention by public authorities can avert greater damage to the economy. The proposed strengthening of crisis management through early warning and early intervention mechanisms by national authorities is a powerful tool against contagion risks in the financial system. Giving relevant authorities the tools to intervene and shut down banks much earlier and allowing weak institutions to exit with less outside scrutiny significantly reduces the vulnerability to confidence crisis.

But the proposals leave a number of open questions about the treatment of the Institutional Protection Schemes (IPS) in several EU countries. IPS have implemented very effective early-warning systems and intervention measures, which, according to the Commission proposal, may overlap with the competences of national authorities.

The IPS have therefore demanded action on two fronts:

1. to ensure that the existing priorities that IPS measures have over the actions of national resolution authorities must be maintained, and
2. for the DGSD to distinguish between mere deposit guarantee schemes and deposit guarantee schemes that are also legally recognised as IPS under the Capital Requirements Regulation (CRR). For these IPS, the DGSD should take into account the mandate of an IPS that fulfils the requirements of Article 113(7) CRR.

There appears to be support at national political levels for the position taken by the IPS. The German government, for example, is reported to have protested against the proposal on these points.

Scope considers further adjustments to the Commission proposals to be likely. If the proposal is implemented in its current form, there is a risk that the effectiveness of IPSs in protecting participatory local small and medium-sized banks could be weakened. This could also have a detrimental effect on the contribution of the IPS to financial stability in the respective EU countries.

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