Conflicting Positions Emerge in Resolving Small Financial Institutions
Title: CMDI Talks Hit a Snag - Council and EU Parliament Lock Horns on Small Bank Wind-Down Rules and National Deposit Guarantees
Capital City Chaos
Negotiations kicked off with a bang: Representation from the two European establishments - the Council and the European Parliament - made zero progress in their initial skirmishes over winding-down rules for small banks (CMDI). In fact, it seemed they were as far apart as ever.
This contentious topic - EU rules governing the wind-down of small and medium-sized banks, plus crisis management of deposit insurance (Crisis Management and Deposit Insurance, CMDI) - is shaping up to be a quandary. This was already clear during the opening of the so-called trilogue, a.k.a., final negotiations between the European Parliament and the Council, with the European Commission in attendance, just before the jolly season. According to an inner summary of the EU Council presidency, as reported by Financial Times, they couldn't even agree on the agenda for the meeting.
Institution protection systems up for debate
The main bone of contention centered on the differing views on the matter of institution protection systems in the CMDI negotiations. These institution protection systems, like those maintained by large German associations of savings banks and cooperative banks, function as liability communities ensuring full creditor protection.
Both the Council's and European Parliament's negotiators displayed a resolute stance during the trilogue meeting. The Hungarian EU Council presidency made it clear that it opposed the European Parliament's desire to treat the institution protection issue separately. In response, the chair of the trilogue, the head of the European Parliament's Economic and Monetary Affairs Committee, Aurore Lalucq, emphasized the European Parliament's strong mandate to the EU Council presidency. The member states should anticipate a determined stand from the European Parliament's negotiators, she warned. All these diplomatic niceties hint at a rocky road ahead.
Simply exchange of ideas
After numerous proposals for the negotiations' progression were shot down by the European Parliament, all parties settled for a "general exchange of ideas on the CMDI legislative proposal," the least binding and most general form of negotiation.
Despite this, the EU Council Presidency affirmed that the text on which the national member states had agreed as the foundation for the final negotiations with the European Parliament ("General Approach") was "in sync" with the objectives of the legislative initiative. The Council had agreed to suggest substantial amendments to the European Commission's proposal in the summer.
Super-preference at the heart of controversy
One of the most significant alterations proposed by the Council is the abandonment of the European Commission's "super-preference status" for national deposit guarantee schemes. Translated, this opposition veers towards banks - not just large financial behemoths, but also smaller institutions - being liquidated instead of being forced into insolvency in the event of a crisis.
Access to funding for this orderly liquidation would come from European clearing agents tapping into funds from national deposit guarantee systems. This could only happen if these systems' privileged status in the creditor hierarchy was eradicated. The European Parliament aligns with the EU Commission's stance, but the EU Council adamantly opposes it.
Support in the Banking Sector
The German Banking Industry Committee (DK), representing associations of savings banks (DSGV), cooperative banks (BVR), private banks (BdB), promotional banks (VOEB), and covered bond banks (VDP), champions the Council's stance on super-preference. The DK urges the German government to support the Council's position from June 2024, as it rectifies "numerous distortions." The DK maintains that preserving the priority of these systems in the creditor hierarchy is "imperative" to secure the funding of these systems and boost depositor confidence.
Against Communitization
The German Banking Industry Committee also objects to the extensive extension of resolution rules to small and medium-sized institutions, as it incorporates burdensome regulations without improving outcomes for consumers or financial stability. The German financial industry associations reject the amalgamation of deposit insurance and bank resolution, as well as the communitization of national guarantee funds at the EU level.
- The European Council and Parliament are deadlocked in their trilogue negotiations over the CMDI, with disagreements on small bank wind-down rules and national deposit guarantees.
- The Hungarian EU Council presidency opposed the European Parliament's separate treatment of institution protection systems, while Aurore Lalucq emphasized the Parliament's strong mandate.
- The Council proposed the abandonment of the European Commission's "super-preference status" for national deposit guarantee schemes, a move opposed by the European Parliament but supported by the German Banking Industry Committee.
- The German Banking Industry Committee also objected to the extensive extension of resolution rules to small and medium-sized institutions, arguing against the communitization of national guarantee funds at the EU level.
- The trilogue meeting settled for a "general exchange of ideas," the least binding form of negotiation, after numerous proposals for progression were shot down by the European Parliament.
- The preservation of the priority of institution protection systems in the creditor hierarchy and access to funding for orderly liquidation are key issues in the CMDI policy-and-legislation discussions affecting the finance, industry, and general news sectors.
