CMDI Reform: Political agreement leaves many questions unanswered

The German Banking Industry Committee welcomes the political compromise on the reform of the EU bank crisis management and deposit insurance framework (CMDI). 

“This compromise is a step in the right direction. Deposit insurance can be modernised, and the European resolution regime strengthened. But key questions on the role and financial burden of the national guarantee schemes remain unanswered,” said Heiner Herkenhoff, CEO of the Association of German Banks, this year’s GBIC coordinator.

The GBIC considers it a positive move that the originally planned extension of the resolution regime to include smaller and medium-sized institutions has been mitigated. In many cases, a regular resolution would be neither necessary nor economically viable. However, it remains to be seen how this matter is dealt with by the resolution authorities in practice. 

Retaining the super-preference also sends out an important signal. The priority status of the deposit guarantee systems in the event of an insolvency remains in place. This strengthens the financing of the schemes and depositors’ trust in them. 

Overall, this compromise represents progress for European crisis management and, at the same time, strengthens the national guarantee schemes. It means that Germany’s institutional protection schemes remain functional and continue to contribute to the diversity of the banking landscape.

Nevertheless, the agreement also brings with it new challenges: In future, the ‘bridge-the-gap’ instrument will allow greater use of deposit protection funds to finance resolution cases. Many of the originally envisaged protection mechanisms are missing from the compromise. This increases the risk of more frequent and greater burdens on the national schemes. 

The GBIC is also critical of the planned changes to the least-cost principle. In future, this is to be harmonised and apply throughout Europe. It should ensure that the most cost-effective option between resolution or depositor compensation is chosen. However, the new calculation method harbours further risks. Rather than ensuring greater efficiency, it may lead to undesirable incentives that generate more costs in the long term and unnecessarily burden deposit protection.

From the GBIC’s point of view, a more streamlined reform approach would have made more sense with clear, practical improvements instead of an overall package with excessive burdens. 

The GBIC will continue to provide constructive support during the legislative process. The aim remains to put in place a stable, proportionate and functioning regulatory framework that is appropriate for the different structures of the European banking sector. Unresolved technical issues should now be addressed under the Danish Council Presidency which starts in July.