The Residual Balances Funds Act and the protection of depositors in dissolution proceedings of credit institutions in the context of EU harmonisation efforts

Abstract

Under the Residual Balances Fund Act, the control and release of funds of depositors of banks that are placed under dissolution and winding up procedures or have their banking licence withdrawn will no longer be entrusted to ‘competent persons’ appointed by the Maltese financial regulator but by a centralised fund set up for such purpose. The objective is to ensure that the controlled release of depositor funds and, in some cases, the failure of some depositors to claim their funds, does not suspend the dissolution and winding up of credit institutions that, for one reason or another, are no longer engaged in the business of banking. If a determination is made that a ‘deposit liability transfer instrument’ should be served by the Maltese financial regulator on a bank, the bank addressed must transfer the deposit liabilities indicated in the instrument along with all corresponding deposit assets to the Residual Balances Fund. As a result, the Residual Balances Fund steps in the shoes of the target bank by assuming the obligation to pay depositors their dues (provided that the necessary compliance reviews are successful) and by extension, the target bank is released from such obligation. From a depositor protection point of view, since ‘deposit liability transfer instruments’ may only be served on banks that are solvent and liquid, in some situations this exposes divergencies between the protections enjoyed by depositors of solvent and liquid banks on the one hand, and the protections enjoyed by depositors of insolvent and illiquid banks on the other. Convergence and harmonisation at EU level in the form of common resolution procedures for failing banks and common rules on national deposit guarantee schemes accentuate the shortcomings identified in the system as currently envisaged under the Residual Balances Fund Act.