Almost fifteen years ago, a financial crisis wiped nearly a trillion euros off European bank balance sheets. Today, after the high-profile collapses of several U.S. institutions like Silicon Valley Bank and the turmoil that followed, there is renewed attention on strengthening banking safeguards. The goal remains clear: reinforce the system so deposits and stability are better protected during stress.
With the absence of a familiar third pillar, the European Commission has pressed forward. On Tuesday it announced that deposit protection will continue to guarantee up to 100,000 euros per depositor, with a robust crisis-management framework for small and medium institutions. This decision follows a broader commitment to complete the banking union and to establish a European deposit guarantee program, still subject to negotiations with member states. Brussels notes that the euro area now boasts well-capitalized banks, ample liquidity, and a crisis framework that has been strengthened in recent years.
However, experience has shown that many medium and small banks facing trouble were saved through measures outside the established EU framework, often relying on taxpayer money rather than private safety nets funded by bank resources or the sector itself. The Vice-President of the European Commission emphasized the aim to expand the resolution toolkit so that more failed banks can be resolved within the system, reducing the need for ad hoc measures that bypass the EU framework. The discussion centers on making crisis funds more accessible to protect depositors, prevent contagion, and minimize damage to the economy.
100,000 deposits
The core level of protection remains unchanged: 100,000 euros per depositor and per bank, as defined by the directive governing deposit guarantees across the EU. A key innovation is the extension of protection to cover public institutions such as hospitals and schools, as well as client funds held by certain entities like investment firms and payment institutions. The proposal, now in Ecofin negotiations, also seeks to harmonize protection for temporary high balances in bank accounts linked to life events such as inheritances or insurance claims.
European rules require troubled banks that are restructured or liquidated to cover at least 8% of their losses with their own funds. The Commission notes that the fund will remain the primary resource for absorbing losses, but if losses exceed what the fund can cover, and resolving the bank is cheaper than guaranteeing all deposits, authorities may turn to national deposit guarantee funds. The Single Resolution Fund is projected to exceed 55 billion euros in 2024 and is expected to reach about 80 billion next year.
Bridge mechanism
The recommendations aim to ensure that any bank failure, regardless of size or model, can be managed in a orderly and consistent manner to prevent a domino effect across the banking system. The mechanism is designed to safeguard financial stability, protect taxpayer money, and maintain depositor confidence. It would support the transfer of deposits, both insured and uninsured, from a failing bank to a sound one through a structured bridge process.
The first line of defense remains a bank’s ability to absorb losses. Authorities must ensure banks have adequate loss-absorption capacity. The bridge would be used for banks that have exited the market and are headed for settlement or bankruptcy, but national authorities retain flexibility to choose between settlement and national bankruptcy proceedings. There is no fixed list of banks that must be settled or face national bankruptcy; decision-making remains in the hands of national authorities, who will select the most appropriate and least costly option at each case.