Background
On June 25, 2025, the Council of the European Union and the European Parliament reached at political agreement to reform the EU's crisis management and deposit insurance (CMDI) framework as part of the trilogue negotiations. The CMDI package comprises revisions to the Bank Recovery and Resolution Directive, the Single Resolution Mechanism Regulation and the Deposit Guarantee Schemes Directive. It was originally unveiled by the European Commission on 18 April 2023 (see for more detail our blog post) and the trilogue positions of the EU bodies were published in March 2025.
The CMDI package intends to enhance the resolution process for banks, particularly small and medium-sized institutions. Historically, many smaller banks lacked sufficient MREL, resulting in increased liquidation under national insolvency frameworks or government bail-outs, exposing taxpayers. The CMDI proposal generally aims to make resolution funding more accessible to these banks, thereby removing a de facto disincentive to utilizing the resolution framework.
Key changes with the final agreement are:
a. Expanded access to industry safety nets
Council and Parliament have agreed that failing banks, especially small and medium-sized, may now tap into deposit guarantee scheme (DGS) or the Single Resolution Fund (SRF) as a last-resort “bridge the gap” mechanism when MREL falls short. In other words, these banks will be allowed to bridge the “funding gap” if they do not meet the 8% MREL requirement by having access to DGS/SRF. Currently, this is only possible where banks have used at least 8% of the individual bank’s total internal resources including own funds and convertible liabilities. Access to the industry safety nets will be subject to strict safeguards ensuring that MREL remains the primary line of defence to curb moral hazard.
b. Least-cost-test
While the CMDI proposal generally aims to make DGS funding available earlier, the use of DGS funds is limited by the so-called ‘least-cost-test’ which is retained according to the recent agreement. This principle dictates that the DGS should only be used in bank resolution if doing so is less expensive than reimbursing covered depositors through liquidation.
c. Refined public interest assessment
The revised framework clarifies the criteria for the public interest assessment (PIA), which is required to initiate a resolution procedure. The new CMDI framework extends the requirements, prioritizing resolution over liquidation when resolution better supports financial stability and depositor protection. The changes will result in an increased likelihood for a bank receiving a positive PIA, particularly for small and medium-sized banks. According to the final agreement, resolution authorities should consider both national and regional impacts in the PIA allowing resolution authorities to consider regional economic impacts in their decisions, acknowledging the significant footprint that some small and medium-sized banks may have.
d. Depositor priority hierarchy
The preference for repaying DGS-protected depositors first is already in place under the current resolution framework. The Commission’s original proposal intended to remove this “super-preference” of covered deposits and to introduce a general depositor preference with a single tier ranking. However, the final agreement retains the “super-preference” of covered deposits, which would be followed by a second tier for deposits of households and SMEs not covered by the DGS, and a third tier for small public authorities (as long as they are not professional investors).
Looking ahead
With this provisional political agreement now struck, technical negotiations will follow. The European Parliament and Council must formalize the legislative text and adopt the reforms - likely in the coming months.
Conclusion
The agreement between the Council and the European Parliament to strengthen the EU's crisis management framework is a pivotal development for the banking sector and marks a further step to complete the EU’s banking union. By addressing the challenges faced by small and medium-sized banks and providing a more robust resolution mechanism, the CMDI reform aims to enhance financial stability and depositor protection across the EU. As the legal texts are finalized, it will be essential to monitor its impact on the banking sector and ensure that it achieves its intended goals.
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