Public funding of failing banks in the European Union (LBF vol. 19) 2020/5.3.5.3:5.3.5.3 Access to resolution financing by deposit guarantee schemes

Public funding of failing banks in the European Union (LBF vol. 19) 2020/5.3.5.3

5.3.5.3 Access to resolution financing by deposit guarantee schemes

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Deposit guarantee schemes are required to make a contribution - not greater than the amount of losses that they would have had to bear if the bank had been wound up in normal insolvency proceedings – when a resolution action ensures that depositors continue to have access to their deposits.1 The deposit guarantee scheme is liable for (a) when the bail-in tool is applied, the amount by which covered deposits would have been written down in order to absorb the losses in the bank, had covered deposits been included within the scope of bail-in and been written down to the same extent as creditors with the same level of priority under the national law governing normal insolvency proceedings, or (b) when one or more resolution tools other than the bail-in tool is applied, the amount of losses that covered depositors would have suffered, had covered depositors suffered losses in proportion to the losses suffered by creditors with the same level of priority under the national law governing normal insolvency proceedings.2

Deposits covered by a deposit guarantee scheme (covered deposits) are excluded from the application of the bail-in tool.3 If a bank is put in resolution, holders of deposits (retail or corporate) covered by a deposit guarantee scheme will therefore not lose their deposits. This only applies up to an amount of EUR 100,000 for the aggregate deposits of each depositor.4 Because deposits covered by a deposit guarantee scheme are excluded from the scope of bail-in, deposit guarantee schemes contribute to funding the resolution process by absorbing losses to the extent of the net losses that they would have had to suffer after compensating depositors in normal insolvency proceedings.5

Resolution financing by the deposit guarantee scheme is triggered by the discretionary decision of the resolution authority, in contrast to the pay-out of covered deposits by the deposit guarantee scheme in case of liquidation of a bank, which is mandatory under the DGS Directive. Resolution financing by deposit guarantee schemes therefore qualifies as EPFS.6

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