Taxpayer and Depositor Protection in the Resolution of Banks in the Banking Union

The thesis discusses the protection of taxpayers and depositors in the resolution of banks in the Banking Union. The research question concerns how the protection of taxpayers and depositors has been organized in the Banking Union. The thesis focuses on the Single Resolution Mechanism and Deposit Guarantee Schemes and will not discuss the other elements of the Banking Union. The protection of taxpayers is discussed vis-à-vis the allocation of the costs of banks under resolution and the protection of depositors in terms of bail-in and Deposit Guarantee Schemes. The thesis answers the research question by employing the doctrinal and practical research methods and thus aims to systematize, interpret and assess the provisions critically. The thesis first discusses the relevant legal theory on the topic. After that, the thesis provides an outline of the Banking Union and analyses first the allocation of costs of banks in resolution and then the protection of depositors in bail-in and in the Deposit Guarantee Schemes. The primary method used in the burden-sharing arrangement is bail-in, in which the shareholders and creditors of a bank are the first ones to bear losses. The deposits of natural persons and SMEs bear losses after other creditors, and the last ones to bear losses are the Deposit Guarantee Schemes, which cover losses in lieu of covered deposits. A central element of the Single Resolution Mechanism is the Single Resolution Fund, which will be used to cover losses after a bail-in of 8 % of the total liabilities of the bank. In addition to the Single Resolution Fund, the burden-sharing arrangement is supported by the direct recapitalization instrument of the European Stability Mechanism (ESM). Legal scholars have presented conflicting views on the effectiveness of bail-in, and the new regime may entail risks to taxpayers. However, the negative effects of bail-in seem smaller than the effects of bailouts, so the introduction of bail-in in the burden-sharing system can be deemed an improvement compared to the current situation. The Single Resolution Fund can also improve the position of taxpayers, since the Fund can prevent or at least reduce the need for taxpayers’ funds in the resolution of a bank. However, the target size of the Fund and the long transition period may impair the effectiveness of the Fund. Legal scholars have questioned the effectiveness of bail-in and the Single Resolution Fund especially in a systemic crisis. Because of the uncertainty associated with these instruments as well as the problems concerning the ESM direct recapitalization instrument the position of taxpayers remains risky, and the possibility of bailing out banks with taxpayers’ money cannot be fully excluded. On the other hand, the Banking Union is still work in progress, so the robustness of these instruments remains to be tested. The protection of depositors in bail-in has been ensured in several ways: the deposits of natural persons and SMEs have been granted preference in the order of loss absorption over shareholders and other creditors. The deposits can also be excluded from bail-in under exceptional circumstances. Additionally, deposits not exceeding EUR 100 000 are fully protected from bail-in. The new Deposit Guarantee Schemes Directive will improve the protection of depositors in multiple ways. The Directive will provide more consistent level of protection in the Member States and confirms EUR 100 000 as the level of guarantee coverage. The Directive will gradually reduce the payout period of covered deposits from the current 20 working days to 7 working days by 2024. The Directive will establish consistent rules on the funding of Deposit Guarantee Schemes, which will be threefold and the target level of which will be 0.8 % of covered deposits by 3rd July 2024. The Directive will also improve the conveyance of information to depositors on Deposit Guarantee Schemes and facilitate the payout process. The Directive will also promote the equal treatment of depositors. The Directive will therefore improve the protection of depositors remarkably and may increase depositors’ confidence in Deposit Guarantee Schemes. The provisions also entail some risks, such as the option of deferral concerning the payout of certain deposits, which, if interpreted broadly, may impair the protection of those depositors to whom the provision applies and place them in a weaker position than other depositors. A major downside of the new Directive is the fact that it maintains national Deposit Guarantee Schemes and will not introduce an EU wide or at least a euro zone wide common Deposit Guarantee Scheme, which would be much more effective in terms of depositor protection than multiple national ones. The introduction of a common Deposit Guarantee Schemes should be considered in the future, although its introduction does not seem very likely at the moment