The European Commission’s proposed banking reform package will allow authorities to tap deposit insurance funds to finance some bank resolutions.
(Bloomberg) — The European Commission’s proposed banking reform package will allow authorities to tap deposit insurance funds to finance some bank resolutions.
The bloc’s current approach “did not fully deliver with respect to key overarching objectives,” the EU’s executive arm says in draft documents seen by Bloomberg. “The reasons are mainly due to misaligned incentives” when national authorities need to choose which resolution tools to use when a bank fails, the commission said.
The changes made to the existing crisis management tools and deposit insurance system would facilitate the resolution of smaller and medium-sized banks while limiting the impact on the financial stability and the real economy without using public funding, the commission noted in the draft documents, which confirm a Bloomberg report from last month.
The reform package comes less than a month after Switzerland, which is not an European Union member, orchestrated an emergency takeover of Credit Suisse Group AG by rival UBS Group AG. The Swiss government said it had no choice but to engineer a rescue since all other options including a forced wind-down would have been even worse.
Read More: Swiss Lower House Delivers Symbolic Vote Against UBS Guarantees
The amendment will allow the use — in some cases — of deposit guarantee funds as bridge financing to complement bank reserves that would be bailed in before the industry-financed fund is used.
In order to facilitate the use of national deposit guarantee schemes for this purpose, the commission says it will tweak some technical requirements and remove the deposit guarantee schemes’ super priority in the creditor hierarchy that limited the use of these funds for other purposes.
The proposals, which the commission is expected to put forward next week, will also facilitate cooperation between authorities working to rescue failing banks.
Read More: Swiss Lower House Debates UBS-CS Deal After First Nod
–With assistance from Alberto Nardelli.
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