“Strengthening the framework for managing bank crises”

Interview with Pedro Machado, Member of the Supervisory Board of the ECB, Supervision Newsletter

13 August 2025

We’ve just seen a breakthrough in the political discussions about reforming the crisis management and deposit insurance framework (CMDI). What happened?

The European Commission came out with a proposal to review the CMDI framework more than two years ago. This package included changes to the Bank Recovery and Resolution Directive (BRRD), the Single Resolution Mechanism Regulation and the Deposit Guarantee Schemes Directive. Several aspects of the package proved controversial and led to difficult discussions in the trilogues between the Commission, the EU Council and the European Parliament. Finally, on 26 June, the co-legislators reached a political agreement on the main elements of the package – namely on a way to provide more flexible access to funding to support resolution actions for small and medium-sized banks. We welcome this breakthrough after months of hard work.

What is the role of the ECB in resolution processes and what is its interest in the CMDI reform?

Before the formal resolution phase is reached, the ECB – in its capacity as the prudential supervisor of significant institutions within the banking union – has a central role in managing banks while they remain a going concern. At this stage, the ECB monitors the institution’s financial situation and can still adopt early intervention and supervisory measures aimed at correcting weaknesses, requiring changes to the bank’s governance, business model, or capital and liquidity positions. It also evaluates whether there are realistic private sector solutions, including those envisaged in the bank’s recovery plan, that could restore viability within a reasonable timeframe to prevent failure.

If the bank’s financial condition continues to deteriorate and these measures do not succeed (for example, the institution is no longer able to comply with regulatory requirements, or there is no credible prospect of recovery), the ECB determines whether the bank has reached the stage of being “failing or likely to fail”. This is a formal legal trigger for the subsequent involvement of the European resolution authority, the Single Resolution Board (SRB), which then decides whether resolution is in the public interest. If so, it selects the appropriate resolution tools and powers – and if not, the institution will be wound up under national insolvency law instead.

Across this entire process, the ECB and SRB maintain close cooperation. There is a constant flow of information and regular coordination well before a potential failure materialises, ensuring that there is no gap between the supervisory phase and the resolution phase. This coordination is essential to ensure both that institutions are resolvable and that authorities can react swiftly once a bank’s situation becomes critical. From the ECB’s perspective, robust and credible resolution mechanisms are an integral part of effective supervision. Supervisors need to know that – once all private and supervisory avenues have been exhausted – there are reliable arrangements in place either to resolve the bank in an orderly way if appropriate, preserving financial stability and protecting public funds, or to allow for an orderly liquidation.

This is why the ECB has a strong interest in the ongoing reform of the CMDI framework. This reform seeks to streamline and strengthen the European framework for managing bank crises, making it more effective, predictable and consistent across euro area countries. It aims to facilitate the use of resolution tools for a broader range of banks, to enhance funding options in resolution, and to ensure that all institutions are truly resolvable. These enhancements directly support the ECB’s objectives of protecting financial stability, safeguarding depositors and reducing reliance on public funds when banks fail.

What is the rationale for prioritising small and medium-sized banks in the reform efforts? Shouldn’t there be greater emphasis on larger banks?

The events of March 2023 in the United States demonstrated that even small and medium-sized banks can be a source of systemic disruption, particularly when confidence erodes and contagion spreads across markets. This underlines the importance of having an adequate and credible crisis management framework to deal with the failure of such institutions in an orderly manner. Unlike large banks, which typically have more diversified funding sources and greater market access, small and medium-sized banks face specific challenges in meeting their Minimum Requirement for Own Funds and Eligible Liabilities (MREL).

Due to their size, business models and limited investor appeal, these banks often have more restricted access to capital markets. As a result, they tend to meet their MREL predominantly with own funds rather than with a broader stock of subordinated liabilities, including senior non-preferred liabilities. This becomes critical when a bank approaches failure. To gain access to the Single Resolution Fund (SRF)^[1] as a source of funding for resolution actions, the institution must first contribute an amount to loss absorption and recapitalisation that is equal to at least 8% of its total liabilities and own funds. However, in the case of small and medium-sized banks, the losses incurred may deplete their own funds, preventing them from reaching that 8% threshold – and leaving little scope to use the SRF. Without additional resources, the burden of loss absorption could fall on other liabilities, such as uncovered deposits, raising concerns for financial stability and depositor confidence.

The CMDI reform addresses this specific weakness. It allows the national deposit guarantee scheme to “bridge the gap” to the 8% threshold by contributing additional funds in resolution, subject to strict conditions and safeguards. This mechanism ensures that the SRF can be deployed more effectively for smaller and medium-sized banks, reducing the need to bail-in uncovered deposits.

In sum, the CMDI reform aims to close a gap in the current framework, making sure that the failure of small and medium-sized banks can also be managed in an orderly way, without jeopardising financial stability or unduly burdening depositors.

Some think that safety nets for banks may contribute to moral hazard. How does the CMDI reform protect taxpayers and citizens?

One of the lessons of the global financial crisis was that we should make sure taxpayers are not on the hook for bank failures. The BRRD makes sure that the first line of defence in a bank crisis are the bank’s shareholders and creditors. The second line of defence is the SRF, which is funded by contributions from the banking sector. Access to the SRF is conditional on fulfilling several strict BRRD requirements. The CMDI introduces more flexibility in accessing the SRF in resolution. By providing a workable European-level solution for resolving small and medium-sized banks, the CMDI fills an important gap and makes the crisis management framework more effective and robust, further reducing the likelihood of recourse to taxpayers’ money in a crisis.

The political agreement is said to be a significant milestone in advancing the banking union. Does it substantially improve the likelihood of a European deposit insurance scheme (EDIS)?

Progress on EDIS, the third pillar of the banking union, has been stuck for years. In 2022 the Eurogroup – which brings together the finance ministers of the countries of the euro area – decided that progress should be made on the CMDI before pursuing other elements of the banking union, most notably EDIS^[2]. The agreement on the CMDI means this condition has been met. We hope discussions on EDIS will resume soon and that Member States are ready to move forward. That being said, there are still many political obstacles that need to be overcome.

Do you see progress in this area enabling more cross-border mergers and acquisitions?

One of the objectives of deepening the banking union is to facilitate the emergence of more cross-border banking groups. Progress on completing the banking union – both its framework and its safety nets – helps to create the confidence and predictability needed for cross-border integration.

For national authorities and markets to support cross-border consolidation, they need to be assured that there are robust European-level tools and common backstops capable of handling a crisis involving a cross-border group. The ongoing CMDI reform is a step in that direction, as it enhances the effectiveness of crisis management and makes the framework more consistent. In addition, the establishment of EDIS would be a further major milestone, as it would boost confidence that depositors enjoy equal protection regardless of where a bank is located.

However, we do not need to wait for EDIS to move ahead with cross-border consolidation. Even under the current framework, there is scope for more cross-border mergers and acquisitions, and supervisors are keen to see this trend develop. Further progress on the banking union will simply make such transactions more natural and less encumbered by fragmentation risks, which in turn will support a more resilient and competitive European banking sector.

What are the next steps for the CMDI reform?

Discussions will now continue, addressing some remaining technical issues so as to fully close the file under the Danish Presidency of the European Union. We are hoping the package can be adopted swiftly – maybe even before the end of the year.