Reset Required: The Euro Area Crisis Management and Deposit Insurance Framework

Abstract

The crisis management and deposit insurance (CMDI) framework in the euro area requires a reset. This article explains why and proposes a new framework. This could start as early as 1 January 2024 when significant institutions in the euro area will have met requirements to have enough subordinated obligations outstanding to recapitalize the bank if it were to fail. The proposed framework has four components: a single lender of last resort (the European Central Bank); a single presumptive path for resolution (exit via the use of bail-in to facilitate orderly liquidation of the failed bank by the Single Resolution Board under a solvent wind-down strategy); an investor of last resort in a bank’s gone-concern capital (its national deposit guarantee scheme); and a Single Deposit Guarantee Scheme (the Single Resolution Fund with a backstop from the European Stability Mechanism). Together, these measures would limit forbearance, assure bail-in did not touch deposits, promote competition, limit recourse to taxpayer money, standardize resolution procedures for all banks, complete Banking Union and guarantee that a euro of covered deposits would remain a euro, all without forcing national deposit guarantee schemes to reinsure one another. Last but not least the proposed framework would promote financial stability.

Keywords: banking, resolution, too-big-to-fail, deposit insurance, euro area, lender of last resort, crisis management, financial stability.

JEL Classification: G01; G18, G21; G28; E44; E58