European policymakers are pursuing legal reforms that will give depositors priority over senior unsecured debt investors when a bank fails — a development that’s a positive for deposits and a negative for senior debt, Moody’s Ratings says.
In a new report, the rating agency noted that policymakers have published a framework for managing failing banks that prioritizes deposits.
“The change in the creditor hierarchy means senior unsecured debt will absorb a greater share of losses in the event of failure,” Moody’s said, “unless banks issue more equal- or junior-ranking debt to offset the reduction in equal-ranking liabilities triggered by the introduction of depositor preference.”
The new approach will only become legally binding once all the members of the European Union adopt the policy into their national laws, the report noted.
Governments will have a two-year transition period from the policy becoming final at the European level — which Moody’s is expecting in the first half of 2026 — to incorporate it at the national level.
“We expect the final agreement by the EU Parliament and the Council on the legislation to occur in early 2026 which will provide certainty on the future creditor hierarchy for EU and, in due course, other European Economic Area banks,” it said.
It’s also expected that governments across the EU will adopt the new creditor hierarchy uniformly, the report noted.
“As a result, bank management teams will benefit from a high degree of clarity around the legislative framework when updating their funding plans and guiding investors,” it said.