ECB backs draft EU rules for winding down smaller banks

FRANKFURT (Reuters) – The European Central Bank on Thursday backed proposed new EU rules for closing down smaller banks when they fail, but said they should be more ambitious and apply across the bloc.

Bank failures have been put in the spotlight by the recent collapses in the United States of Silicon Valley Bank and Signature Bank (OTC:) and the UBS rescue of Credit Suisse.

The EU’s proposal establishes that industry-funded deposit guarantee schemes (DGS) take a loss earlier when a bank fails, a crucial change for mid-sized banks that do not have resources such as bonds that can be written down.

The ECB welcomed the changes, which aim to avoid bailouts by the taxpayer, but said they should go further and make it easier for a failing bank to be taken over.

“The level of ambition of the proposed legislative package is limited in this regard,” the ECB said in a legal opinion.

“The ECB encourages the Union legislators to harmonise and expand … the ability for DGSs to support transfer of assets and liabilities to an acquiring credit institution.”

Under current rules, the failure of a large bank in the bloc is dealt with by the Single Resolution Board (SRB), but winding down the next tier down is subject to differing national practices that can end up using taxpayer money.

The ECB also reaffirmed its long-standing call for an EU-wide deposit guarantee scheme and for the Stability Resolution Fund to provide funding to banks coming out of resolution, the process when authorities decide that a failing bank cannot go through normal insolvency proceedings without harming public interest and causing financial instability.

EU states and the European Parliament have the final say on the reforms, with changes likely during the approval process.

Germany, which wants a carve out from some proposed rules, says not every ailing small bank needs to go into resolution.