In the first part of this article, we dealt briefly with the European Commission’s proposals to further strengthen and ensure the proper application of the existing common framework for managing bank failures, through the publication of a proposed package amending the framework on banks’ crisis management and deposit insurance (“CMDI”) on 18 April 2023.

We also saw that the Commission is proposing to widen the scope for applicability of the European banking resolution regime to cover smaller institutions.  This should be of relevance to Malta which, to date, has not used the European resolution legislative framework when dealing with the liquidation of Pilatus Bank, Nemea Bank or Satabank.

In the second part of this article, we shall tackle the most relevant proposed changes for those readers who are depositors in a Maltese bank, should such proposals see the light of day at EU level.

Depositor preference in the hierarchy of claims

Targeted amendments are being proposed to the EU’s existing Deposit Guarantee Scheme (“DGS”) Directive (“DGSD”). The most relevant changes relate to the manner in and priority with which a failed bank’s creditors and depositors are repaid their assets in case the bank is insolvent and subsequently wound up.

Currently, in case of the insolvency of an EU bank, its depositors are protected in the following manner:

  1. Every depositor will be eligible to claim the first €100,000 deposits via the national DGS (locally the Maltese Depositor Compensation Scheme); and
  2. Where a depositor, being a natural person or a small and medium-sized entity (“SME”), has further deposits in excess of such first €100,000, such depositor enjoys a preferential ranking above any other ordinary, unsecured creditors for the remaining amount.

So, by way of an example, if you as an individual have a bank deposit of €150,000, then €100,000 will be covered by the scheme and paid to you within a short period of time, whereas for the balance of €50,000 you will need to participate in the insolvency ranking which might take a while, but you will enjoy a preference over other ordinary creditors.  In contrast, any depositor who is neither an individual nor an SME does not enjoy any preferential treatment for any deposit in excess of €100,000.  This means that they would rank equally with the bank’s ordinary creditors, making it highly unlikely that they will get paid in full given the insolvency scenario.

The Commission is now proposing to change this process of repayment of claims in case of a bank’s insolvency.  Whilst no changes are being envisaged to the protection offered by the DGSs for the first €100,000 in deposits, the law will be simplified such that any person (individual or corporate) holding in excess of €100,000 will rank equally amongst themselves and in preference to ordinary unsecured creditors.

In other words, no distinction will be made between deposits held by an individual, an SME or otherwise, since all deposits will have a special ranking preference in an insolvency and will be repaid prior to ordinary unsecured creditors (ordinary suppliers etc.).  All depositors get paid first, other normal unsecured creditors after.

Extension of deposits covered by the DGS

The proposed framework also seeks to include new deposits which would be covered by the Member States’ DGS. Amongst other deposits being included, the Commission is proposing the inclusion of deposits made by electronic money issuers, payment institutions and investment firms, which are held with a bank in the course of such institutions’ business for the account of their clients, and which therefore constitute clients’ funds.

The CMDI package also includes other proposals, including additional powers of competent authorities and changes to simplify administrative procedures for national depositor compensation schemes.

This proposal still needs to be discussed and adopted by the European Parliament and the Council of the EU, and, eventually, if and when such discussions are concluded, it needs to be transposed by every Member State into national law.

This article was first published in the ‘Times of Malta’ on the 26th of June 2023.

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