ECB published an opinion (CON/2020/25) on the deposit guarantee scheme and other amendments to the financial services legislation. ECB published this opinion in response to a request from the Luxembourg Ministry of Finance for an opinion on the draft law that seeks to implement the Capital Requirements Directive (CRD5), the Capital Requirements Regulation (CRR2), and the revised Bank Recovery and Resolution Directive (BRRD2) and to amend various provisions of Luxembourg financial sector legislation (draft law). This opinion focuses on certain aspects of the draft law including the backstop arrangements of the Luxembourg Deposit Guarantee Fund (FGDL), orderly winding-up of failing or likely to fail institutions that are not subject to a resolution action, and issuance of participation certificates by the Banque et Caisse d’Epargne de l’Etat (BCEE).
ECB recalls that the efficiency of the deposit guarantee schemes (DGSs) in EU ultimately rests on the credibility of national backstop arrangements, which are, therefore, highly important. Thus, ECB welcomes the draft law that aims to ensure that the FGDL is adequately funded. An adequately funded DGS provides protection for smaller depositors while enhancing financial stability. Sound funding arrangements ensure an effective deposit guarantee and foster the maintenance of public confidence. ECB notes, as pointed out in the explanatory memorandum to the draft law, that several other member states have introduced backstop mechanisms to support the funding of their respective national DGSs. Member states have followed various paths for the setup of their backstops. In some instances, the backstops are based on mandatory arrangements, while in others the provision of the backstop is optional. Some backstops are of a private nature, while other backstops are provided by the State.
The explanatory memorandum to the draft law clarifies that the concept of winding-up used in Article 33-2 of the draft law is to be interpreted broadly and includes procedures such as the suspension of payments, which allow for the restructuring of failing entities. It is important that the provisions of BRRD2 are transposed in a comparable manner across EU member states to ensure a level playing field within the Banking Union. ECB, therefore, recommends clarifying that all procedures applicable to the institution meeting the conditions of Article 32b of the BRRD lead to its winding-up in an orderly manner with the eventual realization of all of its assets. ECB takes note of the amendments to the Law on the BCEE, which ECB understands are aimed at ensuring compliance with the conditions for these instruments to qualify as common equity tier 1 pursuant to Article 28 of the CRR.
Related Link: Opinion (PDF)
Keywords: Europe, Luxembourg, Banking, Deposit Guarantee Fund, Deposit Guarantee Scheme, Opinion, Regulatory Capital, CET 1, CRR2, BRRD2, CRD5, Basel, Resolution Framework, ECB
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