SMEs and retail savers to get stronger protection in bank reforms

European Parliament members (MEPs) have adopted new EU rules to address bank failures, aiming to protect taxpayers and depositors while minimising economic disruption.

The reform establishes that the cost of bank failures should primarily be borne by shareholders, creditors and industry-funded safety nets, reducing reliance on public funds.

It also expands the framework so that more banks fall under resolution measures, while allowing industry-funded deposit guarantee funds to be used in managing failing banks.

At the same time, the rules ensure that retail customers and micro, small and medium-sized enterprises receive stronger protection from losses.

The legislation broadens the scope of EU bank failure rules, enabling authorities to manage crises more effectively and harmonise depositor protection across the Union.

Under the revised framework, deposit guarantee schemes (DGS), which protect deposits up to €100,000, are given the highest priority in repayment during insolvency or resolution proceedings.

Retail depositors and SMEs form the second tier in the repayment hierarchy, followed by small public authorities such as municipalities and regional governments, provided they are not professional investors.

Beyond the standard guarantee, certain deposits linked to real estate transactions will be protected up to between €500,000 and €2,500,000, depending on the circumstances.

The updated rules also extend the resolution framework to include small and medium-sized banks, where intervention is deemed to be in the public interest.

To access external funding, a failing bank must ensure that its investors and creditors absorb losses equivalent to at least 8 per cent of total liabilities and own funds, reinforcing market discipline.

The framework introduces the “bridge the gap” mechanism, allowing DGS funds to help meet this minimum loss-sharing requirement when a bank lacks sufficient loss-absorbing capacity.

This mechanism is designed to support a smoother transfer of a failing bank’s operations and ensure an orderly market exit.

MEPs pushed for simplified conditions for using this tool, ensuring it remains a viable option for smaller banks facing financial distress.

Member states may also permit the use of DGS funds for preventive or alternative measures, either to avoid a bank failure or to ensure depositors can access their funds in case of insolvency.

“This was a very complex file, both economically and politically,” said Ludek Niedermayer, European People’s Party MEP responsible for the Bank Recovery and Resolution Directive.

“However, it makes the EU crisis management framework stronger and more coherent,” he added.

“It broadens the resolution system, in particular for small and medium-sized banks, improves predictability, and harmonises the use of tools across the Union,” he continued.

“It improves safeguards for citizens, SMEs, and municipalities by clarifying how their funds will be treated in the event of a bank failure,” he explained.

“One of the key objectives was to reduce reliance on taxpayers’ money by promoting market-based solutions and private funding mechanisms,” he said. “This was a hard-won compromise, after long and difficult negotiations.”

“More importantly,” Niedermayer said, “this file will enable more agile progress towards the completion of the banking union, which is a very important part of the EU’s key agenda to improve the functioning of the single market.”

“The reform of bank crisis management and deposit insurance framework marks a decisive improvement, making resolution more credible and accessible for small and medium-sized banks, while preserving a prudent framework with loss-absorbing capacity as the first line of defence,” said Irene Tinagli, Progressive Alliance of Socialists and Democrats MEP responsible for the Single Resolution Mechanism Regulation.

“At the same time, the agreement strengthens the effective use of industry-funded instruments within a clear and robust framework,” she added.

“It also safeguards the integrity and independence of European governance, ensuring consistency, legal certainty, and greater harmonisation across the banking union,” she continued.

“This represents a clear step forward in reinforcing financial stability and integration, while underlining the need for further progress towards a fully-fledged European deposit insurance scheme to complete the banking union,” she said.

Meanwhile, Kira Marie Peter-Hansen, Greens European Free Alliance MEP responsible for the Deposit Guarantee Schemes Directive, said that “it is more important than ever to have a robust and resilient regulatory framework that enables banks to continue to finance the real economy throughout the economic cycle”.

“The adoption of the crisis management and deposit insurance review, and in particular of the Deposit Guarantee Scheme Directive, is an important first step in that direction and towards the completion of banking union,” she added.

“The main objectives of this review have been achieved,” she stated.

“The scope of the resolution has been expanded, while still providing sufficient safeguards to ensure that deposit guarantee schemes remain sufficiently funded,” she explained.

“At the same time, we have harmonised the deposit guarantee scheme toolbox, moving towards a more integrated European banking sector,” she continued. “Nonetheless, these are targeted reforms.”

“More ambitious action will be needed to finally complete the banking union, including a fully-fledged European deposit insurance scheme,” she concluded.

The legislative package includes three key components, namely the Bank Recovery and Resolution Directive, the Single Resolution Mechanism Regulation and the Deposit Guarantee Schemes Directive.

The new rules will enter into force on the twentieth day following their publication in the Official Journal of the European Union and will apply, with some exceptions, from 24 months after entry into force.