The Council of the European Union has adopted a reform of the Deposit Guarantee Schemes Directive (2014/49/EU) that permits deposit guarantee funds to finance the resolution of small and medium-sized banks when their own resources are insufficient, subject to strict conditions. The reform, agreed at a Council meeting on 27 January 2026 and now published, aims to enhance the EU's banking crisis management framework while protecting depositors and taxpayers.
The Council's position maintains national discretion for using deposit guarantee funds for preventive measures, clarifies rules for Institutional Protection Schemes, and applies a uniform 'least cost test' to ensure financial soundness. The test requires that using deposit guarantee funds for resolution is less costly than paying out depositors directly, balancing effective resolution tools with fund protection.
Policy trade-offs and stakeholder impact The reform introduces a trade-off between enhancing resolution options for small and medium-sized banks and safeguarding deposit guarantee funds. For EU regulatory bodies, the uniform 'least cost test' provides a clear framework but may limit flexibility. National authorities retain discretion for preventive measures, preserving some sovereignty. EU banks, particularly smaller ones, may benefit from increased access to resolution funding, potentially reducing liquidation risk. However, deposit guarantee schemes face increased exposure to resolution costs, which could strain resources if not carefully managed. EU depositors are indirectly protected as the reform aims to maintain confidence in the banking system, but fund use for resolution could reduce payouts in case of multiple bank failures.
Expected institutional follow-up The Council's position will now be transmitted to the European Parliament for its first reading. The Parliament's Committee on Economic and Monetary Affairs is expected to review the proposal, potentially proposing amendments. Final adoption will require agreement between the Council and Parliament under the ordinary legislative procedure.
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