Deposit Guarantee Schemes: The Key Tool for Avoiding a Disorderly Exit from the Market for Small and Medium-Sized Banks in Difficulty

The aim of this paper is to show that one of the missing pieces in the regulatory puzzle of banking crisis management is a set of rules allowing for a flexible use of Deposit Guarantee Schemes (DGS) to deal with the financial difficulties of small and medium-sized banks, when resolution proceedings doesn’t apply. To achieve this goal, the European legislator should take stock of the US experience. The paper supports the idea that making the solutions adopted in the US applicable in Europe does not require a large-scale harmonisation of national laws on bank insolvency, which is politically unfeasible. A few common principles in the regulation of the operational activities of DGSs would entitle them to intervene in a banking crisis situation with preventive interventions and, after the declaration of “failing or likely to fail”, to support the sale of the assets and liabilities of the ailing bank to a sound intermediary. The paper does not question the important objective underlying the Bank Recovery and Resolution Directive (BRRD), namely, to protect public funds by minimising the need for extraordinary public financial support. On the contrary, it argues that the flexible application of the “least cost principle” is consistent with the overall picture established in 2013/2014 to limit government interventions. The paper’s conclusions are consistent with the objectives underlying the BRRD reform, also known as the CMDI, on which the Council and the EU Parliament reached a political agreement in June 2025.