New Resolution Rules for EU Banks: The CMDI Package at a Glance

Current Framework

Under the current BRRD, resolution action is treated as in the public interest if it is "necessary for the achievement of and is proportionate to one or more of the resolution objectives […] and winding up of the institution under normal insolvency proceedings would not meet those resolution objectives to the same extent." (Art. 32(5) BRRD).

New Framework

The new Art. 32(5) BRRD introduces a two-step public interest test:

• Step 1: Resolution is not necessary in the public interest if the resolution authority concludes that none of the resolution objectives would be at risk if the institution were wound up under normal insolvency proceedings.
• Step 2: If one or more resolution objectives would be at risk, the PIA should be negative only where winding up would meet those objectives "not only to the same extent as resolution but more effectively."

The parallel changes in the SRMR mirror this two-step assessment for the SRB.

This is a significant lowering of the threshold. Under the old framework, the comparator was "to the same extent"; under the new framework, insolvency must be more effective than resolution to defeat a positive PIA.

Additionally, when carrying out the PIA, the resolution authority must now compare extraordinary public financial support expected in resolution versus in insolvency and must prefer industry-funded safety nets (such as resolution financing arrangements, DGSs) over taxpayer funding of an equal amount.

The focus is therefore no longer exclusively on large, systemically important institutions — smaller and medium-sized, predominantly deposit-funded institutions are also intended to fall within scope.

Current Framework

The current Art. 27 BRRD links the early intervention measures of the competent authority to an institution infringing or being likely to infringe prudential requirements, with a broad list of overlapping measures. Prior application of other remedial measures was not explicitly addressed, and the removal of management and appointment of temporary administrators were separate measures under Art. 28 and 29 BRRD with distinct, more stringent triggers.

New Framework

The new Art. 27 BRRD simplifies and consolidates the early intervention framework:

• The competent authority may now determine that early intervention measures are warranted without having previously taken other remedial actions — i.e., a prior unsuccessful attempt at other measures is not required.
• Removal of management (new Art. 28) and appointment of temporary administrators (new Art. 29) are now explicitly designated as early intervention measures and subject to the same triggers as other early intervention measures.
• A new early intervention measure allows the authority to require the institution's management body to draw up a voluntary wind-down plan.
• The authority must require the institution to change its legal structure where appropriate.
• The principle of proportionality must be observed when choosing measures.

For institutions subject to the SRM, the early intervention powers have been incorporated directly into the SRMR as new Art. 13, 13a, 13b, and 13c SRMR. Similar to the above, the European Central Bank (ECB) may apply early intervention measures without having first taken other remedial actions (as under the BRRD). Specifically, new preparation for resolution provisions (Art. 13c) require the ECB or the national competent authority (NCA) to notify the SRB early of deteriorating situations, and grant the SRB powers to market institutions, request information updates, and require virtual data rooms to share information with potential acquirers or advisors — without prior early intervention being a prerequisite.

Current Framework

The current Art. 108 BRRD established a partial three-tier depositor preference:

1. Covered deposits and DGS subrogating to the rights of covered depositors (highest priority).
2. Eligible deposits of natural persons and micro, small and medium-sized enterprises (SMEs) above the coverage level.
3. All other claims — the ranking of remaining deposits was not harmonised and left to national law.

New Framework

The new Art. 108 (1) BRRD introduces a full general depositor preference with three harmonised tiers:

1. First tier:

• Covered deposits
• DGS subrogation to the rights of covered depositors

2. Second tier:

• Eligible deposits of natural persons, SMEs, and specific public authorities above the coverage level
• Deposits that would be eligible if not made through non-EU branches

3. Third tier — general depositor preference:

• All other deposits not referred to in (a) and (b), ranking higher than ordinary unsecured creditors.

Excluded from the general depositor preference: deposits taken by a credit institution for MREL compliance purposes and certain other non-eligible deposits.

Therefore, while the initial Commission’s proposal had intended to remove the super-preference in favour of a single-tier general depositor preference, the final agreement retained it with the three-tier structure. 

Resolution Financing Arrangement Claims

A new Art. 108 (8)-(9) BRRD grants the resolution financing arrangement's claims against the residual entity (after a partial transfer) a preferred priority ranking higher than depositors and DGS claims.

MREL-Eligible Deposits

A new Art. 45b (1a)-(1b) BRRD introduces stricter conditions for deposits to count towards MREL:

• Deposits must be term deposits with original maturity of at least one year with no right of early reimbursement (even if subject to a penalty).
• Contractual documentation must explicitly state the intention to use the deposits for MREL and that they are not covered by the DGS.
• The resolution authority must authorise the inclusion of such deposits in MREL.

Grandfathering

Deposits issued as eligible liabilities before 12 May 2028 are not subject to the new requirements. This grandfathering expires on 11 May 2029.

Minimum MREL for Transfer Strategies

Pursuant to the new Art. 45c (6a) BRRD, for resolution entities whose preferred resolution strategy envisages primarily the sale of business tool or bridge institution tool (with market exit), and whose resolution group's total assets exceed EUR 30 billion, the MREL must be at least:

• 15% of total risk exposure amount (TREA) (risk-weighted basis), and
• 4.5% of total exposure measure (TEM) (leverage basis).

In the SRMR, these thresholds are set at 16% and 4.75% respectively (new Art. 12d (5a) SRMR).

Current Framework

Under the current Art. 109 BRRD, the DGS contribution in resolution was limited to the amount it would have borne in insolvency, capped at 50% of its target level pursuant to Art. 10 DGSD.

New Framework

The new Art. 109 BRRD significantly expands the use of DGSs in resolution:

• Transfer strategies (sale of business/bridge institution): the DGS contributes the difference between transferred assets and transferred deposits/liabilities with equal or higher priority, plus amounts for capital neutrality.
• DGS contributions may count towards the 8% bail-in threshold for access to resolution financing arrangements, subject to conditions including:
  • The total assets if the institution under resolution does not exceed EUR 80 billion.
  • The institution was not identified as a liquidation entity in the preceding 24 months.
  • The institution’s own funds and eligible liabilities have been used in full for loss absorption and recapitalisation.
• For institutions with total assets between EUR 30–80 billion, the contribution of the DGS is capped at 2.5% of the total liabilities including own funds (TLOF) of the institution under resolution.
• The overall DGS contribution is capped at 62.5% of its target level pursuant to Art. 10 DGSD (for transfer strategies), unless the designated authority waives this limit to avoid adverse effects on financial stability.
• An additional DGS contribution may be required after the 5% resolution fund contribution is exhausted, equal to losses covered deposits would have suffered proportionally.

A new Art. 32c BRRD (and parallel Art. 18a SRMR) codifies and refines the conditions for extraordinary public financial support (such as State aid within the meaning of Article 107(1) TFEU) outside of resolution action, which may be granted only in specific cases. 

• Precautionary measures may now include impaired asset measures (e.g., asset management vehicles or guarantee schemes).
• Common Equity Tier 1 instruments may only be acquired exceptionally, capped at 2% of the total risk exposure amount (TREA) of the institution concerned (with possibility of exceeding under exceptional circumstances).
• A predefined exit strategy is required, if institutions fail to redeem or repay the financial support in line with the predefined terms, and institutions must submit a one-time remediation plan; failure to comply triggers a failing-or-likely-to-fail determination.