The EU changes the rules on bank bankruptcies to protect deposits and taxpayers

The European Parliament has adopted a reform that extends banking resolution rules to more institutions, strengthens the protection of depositors, and aims to reduce dependence on public money in the event of a banking crisis.

The European Parliament adopted new rules on Thursday that extend the application of the EU framework for the orderly management of bank failures, with the aim of limiting economic disruptions, protecting depositors, and reducing taxpayer exposure in the event of a bank collapse.

In short: The new rules expand the range of banks that can come under resolution measures, including some small and medium-sized banks. Losses are to be borne first by shareholders, creditors, and industry-funded safety mechanisms. Deposit guarantee schemes receive a more important role both in the repayment hierarchy and in the financing of resolution. Retail clients, micro-enterprises, and SMEs will benefit from stronger protection against losses. The rules will come into force on the twelfth day after publication in the Official Journal of the European Union and will apply, with some exceptions, after 24 months.

The adopted package broadens the scope of banks covered by European legislation on bank insolvency and resolution, in an attempt to make crisis management more coherent at the Union level. According to the text voted, authorities will have clearer tools to manage potential bank failures, and the protection of depositors will be better harmonized across the entire EU space.

One of the most important changes concerns the position of deposit guarantee schemes in insolvency or resolution procedures. This mechanism, funded by the industry and designed to protect eligible deposits up to 100,000 euros, receives the highest rank in the repayment hierarchy.

Retail depositors and micro-enterprises, small and medium-sized enterprises form the second level, while small public authorities, such as municipalities and regional governments, reach the third level, provided they are not professional investors.

The text goes further than the standard guarantee of 100,000 euros per depositor and per bank. Certain deposits related to real estate transactions will also benefit from protection, in a range starting from 500,000 euros and potentially reaching up to 2,500,000 euros, depending on circumstances. Through this provision, the reform seeks to respond to situations where large but temporary amounts may be exposed at the time of a major transaction.

Another central element of the reform is the extension of the resolution framework to small and medium-sized banks, where there is public interest. Resolution, the mechanism used by authorities to safely restructure or close a troubled bank, was mainly associated with larger institutions and those with evident systemic risks. Through the new framework, Parliament supports a broader approach, where smaller institutions can also come under resolution measures if financial stability or depositor protection requires it.

For access to external funds, the basic rule remains that investors and creditors of the bank must first absorb losses equivalent to at least 8% of the total liabilities and equity of the institution. The reform also introduces a mechanism called "bridge the gap," through which funds from deposit guarantee schemes can contribute to reaching this minimum threshold of 8% in the case of a bank primarily funded by deposits, which does not have sufficient capacity to absorb losses. Parliament insisted that the use of this mechanism be simplified, so that it remains a real option, especially for smaller banks.

Member states will also be able to allow the use of DGS funds for preventive or alternative measures, either to prevent the bankruptcy of a bank or to ensure that depositors can access the funds in case of insolvency. Politically and economically, this is one of the essential points of the compromise, as it shifts the focus towards industry-funded solutions and early interventions, before pressure reaches public finances.

The rapporteur for the BRRD, Luděk Niedermayer, stated that "This was a very complex file, both economically and politically. Nevertheless, it makes the EU crisis management framework stronger and more coherent. It expands the resolution system, especially for small and medium-sized banks, improves predictability, and harmonizes the use of instruments across the Union. It enhances guarantees for citizens, SMEs, and municipalities, clarifying how their funds will be treated in the event of a bank failure."

The same MEP emphasized that one of the key objectives was to reduce dependence on taxpayer money by promoting market-based solutions and private funding mechanisms. He described the text as the result of "a hard-fought compromise, after long and difficult negotiations" and linked the reform to progress towards completing the banking union, which he presented as an important part of the EU agenda for improving the functioning of the single market.

The rapporteur for the SRMR, Irene Tinagli, said that "The reform of the banking crisis management and deposit insurance framework marks a decisive improvement, making resolution more credible and accessible for small and medium-sized banks, while maintaining a prudent framework, with loss absorption capacity as the first line of defense. At the same time, the agreement strengthens the effective use of industry-funded instruments within a clear and robust framework. It also protects the integrity and independence of European governance, ensuring coherence, legal security, and greater harmonization across the banking union. This represents a clear step forward in strengthening financial stability and integration, while also highlighting the need for further progress towards a fully European deposit insurance system, EDIS, to complete the banking union."

The rapporteur for the DGSD, Kira Marie Peter-Hansen, stated that "In today's volatile geopolitical and economic environment, it is more important than ever to have a robust and resilient regulatory framework that allows banks to continue financing the real economy throughout the economic cycle. The adoption of the review of the crisis management and deposit insurance framework, and especially the Directive on deposit guarantee schemes, is an important first step in this direction and towards completing the banking union. The main objectives of this review have been achieved. The scope of resolution has been expanded, while at the same time providing sufficient guarantees to ensure that deposit guarantee schemes remain adequately funded. At the same time, we have harmonized the toolkit of deposit guarantee schemes, advancing towards a more integrated European banking sector. However, these are necessary reforms. More ambitious actions will be needed to complete the banking union, including a fully European deposit insurance system."

The legislative package includes three files, the Directive on bank recovery and resolution, the Regulation on the single resolution mechanism, and the Directive on deposit guarantee schemes. Together, they redesign the European framework for managing bank failures, at a time when the Union seeks to combine financial stability, depositor protection, and market discipline without reverting to the logic of massive taxpayer-funded bailouts.

The reform adopted by the European Parliament is part of the review of the European crisis management and deposit insurance framework, also known as the CMDI package. The text aims to make bank resolution more usable, especially for smaller institutions, clarify the role of deposit guarantee schemes, and strengthen the protection of certain categories of depositors. According to the proposed timeline, the new rules will come into force on the twelfth day after publication in the Official Journal of the European Union and will apply, with some exceptions, after 24 months. The broader political debate remains open, as many MEPs have presented the reform as a step forward, but not as the completion of the banking union, in the absence of a fully European deposit insurance system.