CMDI Reform

Introduction

The Crisis Management and Deposit Insurance (CMDI) package, published on 20 April in the Official Journal of the European Union, represents a significant milestone in the ongoing development of the EU’s bank resolution and insolvency framework. The package will enter into force on the twentieth day following its publication and will apply 24 months thereafter, providing institutions and authorities with a clearly defined transition period to prepare for its implementation.

Building on the post crisis architecture established by the BRRD and the Deposit Guarantee Schemes Directive, the reforms aim to

• reduce fragmentation across Member States,
• strengthen depositor protection,
• and enhance the effectiveness of crisis management tools

—particularly for small and medium sized banks.
By refining key elements such as

• creditor hierarchy,
• the least cost test,
• the public interest assessment and
• the use of industry funded safety nets,
  

the CMDI package seeks to ensure that bank failures can be managed in a more orderly, predictable and cost efficient manner, while safeguarding financial stability and limiting recourse to taxpayer funds.

Creditor Hierarchy

Although the EU has taken steps to align certain aspects of bank failure management, insolvency proceedings themselves remain governed by national legislation, resulting in continued divergence across Member States. In the post‑crisis regulatory reforms, the EU harmonised both the deposit coverage level and the criteria for eligible deposits, and Article 108 of the BRRD introduced a common depositor ranking framework applicable in bank insolvency. Under this framework, deposit claims are structured into three priority layers:

• covered deposits up to €100,000 (with super-preference to refund deposit guarantee scheme - DGS),
• eligible deposits above the covered part of individuals and SMEs,
• and all other deposits.

With the official publication of the CMDI package, the revised framework adds greater clarity and precision to the existing depositor‑ranking system and strengthens depositor protection while retaining the core structure already established under the BRRD. Under the updated hierarchy applicable, the DGS — the industry‑funded mechanism that protects eligible deposits up to €100,000 and subsequently recovers those amounts as a privileged creditor — continues to hold its super priority in the repayment hierarchy, ensuring that its reimbursement claims are treated consistently across Member States. Immediately below the DGS, retail depositors and micro‑, small‑ and medium‑sized enterprises, as well as eligible deposits of small public authorities (municipalities and regional governments not qualifying as professional investors) above the coverage level, remain grouped in the second tier. However, the CMDI package sets out this tier more explicitly and with clearer definitions, underscoring their relevance for financial stability and the functioning of the real economy. A third tier encompasses all other deposits that do not fall within the first two categories, which continue to rank ahead of ordinary unsecured creditors, providing a more concrete and uniform treatment of the remaining deposit base within the harmonised framework.

In addition to the harmonised €100,000 coverage limit, the CMDI package also strengthens depositor protection by introducing elevated safeguards for certain deposits linked to real‑estate transactions. Depending on the specific circumstances, these deposits may now benefit from enhanced protection thresholds ranging from €500,000 to €2,500,000, ensuring that individuals involved in significant property‑related financial commitments receive appropriate protection during periods of institutional stress.

Looking ahead, the CMDI package also reinforces the broader objective of protecting retail clients from inappropriate exposure to complex and bail‑in‑able instruments. Recognising the need for consistent safeguards across the Union, the final framework requires EBA, in coordination with ESMA, to conduct an EU‑wide review within 18 months of entry into force on how Member States apply restrictions on the sale of MREL‑eligible instruments to retail investors. This assessment will examine the effectiveness of national measures, identify any gaps or divergences, and consider their implications for cross‑border distribution. Depending on the outcome, the Commission may pursue further harmonisation or targeted legislative adjustments, signalling that the EU intends to keep this area under scrutiny to ensure a high and uniform level of retail‑investor protection across the Single Market.

Least Cost Test

The Least Cost Test (LCT) has historically been applied inconsistently across Member States, resulting in significant differences in how DGSs determined the maximum amount they could contribute beyond their core pay‑out function. To address this divergence, the CMDI package revises the least cost test by expanding it beyond a simple comparison of intervention costs and payout costs, requiring the DGS to also consider indirect liquidation losses, thereby making DGS support in resolution easier to justify.

Under the CMDI reforms, any DGS intervention provided as a preventive measure [Article 11(3)] or as an alternative measure [Article 11(5)] — is capped at the lower of

i. the amount of covered deposits at the institution and
ii. the maximum amount permitted for the specific intervention [Article 11(3) or Article 11(5)].

In contrast, DGS contributions to resolution are limited exclusively by the amount of covered deposits, as no intervention specific quantitative ceiling applies in the context of resolution financing [Article 11(2)].

In practical terms, this means that DGS funding can never exceed what a standard payout in insolvency would have cost. This ensures that early intervention or support in resolution remains cost‑effective, proportionate, and aligned with the core mandate of the DGS, while safeguarding the industry‑funded resources that underpin depositor confidence across the European Union.

Public Interest Assessment (PIA)

PIA is a central element of the EU’s bank resolution framework, used to determine whether a failing bank should be resolved or instead handled through normal insolvency proceedings. Its role is to ensure that resolution is only applied when it is necessary to achieve key public interest objectives—such as safeguarding financial stability, protecting depositors, and limiting the use of public funds—and when these objectives cannot be achieved equally effectively through insolvency. In this sense, insolvency has traditionally functioned as the default option, with resolution reserved for situations where broader systemic concerns are at stake.

Recent reforms under the CMDI package have reshaped how the PIA is understood and applied. While the formal structure still presents insolvency as the baseline, the revised framework introduces a more flexible approach that increases the practical scope for resolution. In particular, the assessment no longer operates solely as a strict threshold test but allows for a broader interpretation of when resolution may serve the public interest. This shift reflects a policy objective of extending resolution tools beyond systemically important institutions, making them more accessible for small and medium-sized banks as well.

A key development is the introduction of a more structured, multi-step assessment. Authorities first evaluate whether resolution objectives—such as maintaining critical functions and preserving financial stability—are met. Where relevant, additional considerations, including cost efficiency, may be taken into account in a subsequent stage. Rather than treating cost minimization as a standalone objective, it is embedded within a broader evaluative framework, allowing for a more nuanced comparison between resolution and insolvency outcomes.

The framework also incorporates presumptive elements to guide decision-making. Larger institutions are generally more likely to meet the criteria for resolution, whereas smaller banks—particularly those subject to simplified regulatory obligations—are presumed to be more suitably handled through insolvency. However, these presumptions are not absolute and can be rebutted where circumstances indicate that insolvency would fail to adequately achieve the underlying public interest objectives.

Depositor protection has been further clarified and strengthened within the assessment. The focus is placed on covered deposits as well as certain eligible deposits held by individuals and small and medium-sized enterprises. At the same time, the definition of critical functions has been refined to account for regional considerations, acknowledging that the failure of certain institutions may have significant localized impacts even if they are not systemically important at the national or European level.

Overall, the revised PIA reflects a careful balancing of competing priorities. It enhances flexibility in the application of resolution tools while maintaining safeguards that preserve insolvency as a viable and often appropriate alternative. At the same time, it reinforces the importance of depositor protection and ensures that cost considerations do not override broader public interest objectives. The result is a more coherent and adaptable framework that accommodates the diversity of banking systems across the Union while supporting a consistent and effective approach to crisis management.

Bridge-the-Gap-Instrument

The “Bridge the Gap” instrument represents one of the most innovative elements within the CMDI reform package. Its central purpose is to enable the use of industry-funded safety nets—particularly DGS—to support banks in resolution, especially small and medium-sized institutions, while minimizing reliance on public funds. Over the course of the reform process, the instrument has been significantly refined, reflecting the need to balance financial stability, depositor protection, and cost-effectiveness within a coherent resolution framework.

At its core, the instrument is designed to address a structural challenge in bank resolution: smaller institutions often lack sufficient bail-inable liabilities to meet the 8% Total Liabilities and Own Funds (TLOF) threshold required to access resolution financing arrangements. The Bridge the Gap mechanism allows DGS resources to temporarily fill this shortfall, thereby facilitating orderly resolution and preserving market confidence. Its use is subject to strict conditions, including the requirement that the institution is not subject to liquidation and is expected to exit the market following resolution. Safeguards are also built in to limit moral hazard and discourage excessive risk-taking.

As the framework evolved, additional layers of calibration and proportionality were introduced. One key feature is the differentiation of DGS contribution limits based on the size of the institution. Smaller banks may benefit from relatively higher support, while stricter caps apply as bank size increases, and access is ultimately excluded for the largest institutions. In parallel, quantitative limits have been placed on the overall use of DGS funds, ensuring that contributions remain within a defined share of available resources, with limited flexibility in exceptional systemic circumstances.

Access to the instrument is further conditioned on regulatory preparedness. Institutions are generally required to demonstrate prior compliance with minimum requirements for own funds and eligible liabilities (MREL) over a specified period before resolution. In addition, the use of the instrument is tied to credible exit strategies, such as orderly winding-up or the termination of operations following the use of a bridge institution. Certain exclusions also apply, notably for institutions that have been previously identified as candidates for liquidation within a defined timeframe prior to resolution.

At the same time, the framework maintains a degree of flexibility to ensure that resolution remains a viable option across a broad range of institutions. While safeguards and eligibility criteria are clearly defined, they are not intended to unduly restrict access where resolution would better serve public interest objectives. This reflects an emphasis on ensuring that smaller and medium-sized banks can be resolved effectively without triggering systemic disruption or undermining depositor confidence.

Overall, the development of the Bridge the Gap instrument illustrates the broader ambition of the CMDI reform to modernize the EU’s bank resolution toolkit. It combines technical mechanisms to address gaps in loss-absorbing capacity with policy safeguards that ensure proportionality and financial stability. The resulting framework reflects a careful balance between flexibility and discipline, enabling more effective crisis management while maintaining strong protections for depositors and limiting the exposure of public resources.

Conclusion for banks

For banks, the revised CMDI framework represents a more predictable, transparent, and operationally disciplined environment for crisis management. The clarification of

• depositor ranking tiers,
• the reinforced super‑preference of the DGS, and
• the more precisely defined treatment of retail, SME and public‑sector deposits

result in a more harmonised and clearly structured liability waterfall across the EU. At the same time,

• the updated least cost test and
• the revised rules for preventive and alternative measures

ensure that DGS interventions remain strictly cost‑controlled, while giving authorities greater flexibility to act early and preserve depositor access. This is complemented by

• a more workable Public Interest Assessment, which makes resolution a more credible option for a broader set of banks by placing greater emphasis on depositor protection and continuity of critical functions, and
• the Bridge‑the‑Gap instrument, which enhances the feasibility of orderly resolution for smaller institutions while preserving strong safeguards against moral hazard and public‑fund reliance.

We at Deloitte support you in navigating the increasing complexity of the evolving EU crisis management and resolution framework and in translating regulatory requirements into practical, forward-looking solutions.

In particular, banks can benefit from targeted support in the following areas:

• Creditor hierarchy analysis and liability structuring
  Assessment of the bank’s liability structure against the revised CMDI depositor ranking, including identification of subordination risks, implications for bail‑in execution, and optimisation of funding instruments to ensure consistency with the harmonised insolvency waterfall across Member States.
• Insolvency and resolution impact analyses
  Modelling of insolvency and resolution outcomes under the updated creditor hierarchy to assess depositor, creditor and DGS impacts, supporting management decision‑making, recovery planning, and discussions with resolution authorities.
  
  
• Least Cost Test readiness and methodology support
  Support in interpreting and operationalising the revised Least Cost Test, including identification and quantification of indirect liquidation costs, alignment of internal data and assumptions, and preparation of documentation to support DGS involvement in preventive, alternative or resolution measures.
  
  
• DGS interaction and contribution planning
  Advisory support on positioning the institution for potential DGS interventions under the revised LCT framework, including assessment of funding limits, interaction with resolution strategies, and integration into recovery and crisis playbooks.
  
  
• Integration of PIA logic into internal frameworks
  Embedding the revised Public Interest Assessment criteria into internal stress testing, recovery planning, and decision-making processes.
  
  
• Resolvability assessment and optimization
  Comprehensive review of your current resolvability setup, including identification of gaps and implementation of measures to meet regulatory expectations efficiently.
  
  
• MREL calibration and liability structure design
  Support in optimizing the composition of own funds and eligible liabilities, taking into account regulatory requirements and the implications of the insolvency ranking to ensure effective bail-in capacity.
  
  
• Exit strategy and restructuring planning
  Preparation of robust and credible exit plans, including wind-down scenarios and bridge bank strategies where applicable.
  
  
• Resolution strategy design and validation
  Development and independent validation of credible resolution strategies, ensuring alignment with supervisory expectations and practical feasibility in stress scenarios.
  
  
• DGS and Bridge the Gap readiness
  Assessment of eligibility and strategic positioning regarding the use of DGS funds, including the Bridge the Gap instrument, and support in meeting the associated conditions.
  
  
• Regulatory interpretation and implementation
  Ongoing guidance on evolving regulatory expectations, helping you anticipate supervisory priorities and implement changes in a timely and compliant manner.
  
  
• Program management and implementation support
  End-to-end support in executing complex regulatory transformation programs, ensuring efficient coordination across functions and sustainable implementation.

By combining regulatory expertise with practical implementation experience, we help you strengthen resilience, enhance strategic flexibility, and position your institution effectively within the new resolution framework.