to Financial Crisis Andras FeketeGyor Role of Deposit Insurance in Bank Resolution Framework Lessons from the Financial Crisis November 1316 2011 JODHPUR INDIA Outline ID: 1029240
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1. Deposit Insurers’ Response to Financial CrisisAndras Fekete-GyorRole of Deposit Insurance in Bank Resolution Framework – Lessons from the Financial CrisisNovember 13-16, 2011 JODHPUR, INDIA
2. OutlineDifferencies in policy mix Weaknesses of depositor protection Jurisdictions that Enhanced Deposit Insurance ProtectionMeasures towards enhanced depositor protection Actions Taken to Increase Deposit Insurance Emergency Deposit Insurance Measures by ContinentThe new role of DIS expandedLimitationsConclusions
3. Motto: Deposit insurers are main benefiters of financial crisis
4. Differencies in policy mix In comparison with previous crisis:Provision of vast liquidity to the marketsDirect asset purchases Public guarantees behind troubled non-banking assets and/or banksQuantitative EasingsAre these measures sustainable in terms of financial stability?
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6. Weaknesses of depositor protection No depositor protection at all → DI proliferates rapidly in the aftermath of crisisLack of convergence → system design varies across the globeLack of harmonized cross-border action (Iceland)Post-funded systems → may not work under distressLarge distortions in coverage levels → deposit flight (cross-border issues)Disfunctional legal provisions (co-insurance, consolidated consumer protection, too complicated rules, long payout timeframe) → issue of confidence
7. Measures towards enhanced depositor protectionRelatively small number of failures with involvement of DIS (government support instead)New rules (standards) are put in place and enforced → G20, FSB, BIS (CBRG), IADI, EU Commission → IMF (FSAP)Blanket guarantee (temporary)Higher coverage levels (final)Mandate enhancement Simplified rules → co-insurance and set-off abolished; fast payout; SCV files
8. Jurisdictions that Enhanced Deposit Insurance ProtectionIADI: Based on "Update on Unwinding Temporary Deposit Insurance Arrangements," Report to the Financial Stability Board, Note by staffs of IADI and IMF, June 2010; and press releases from media and agency websites.
9. Actions Taken to Increase Deposit Insurance (Categorizations Based on Initial Actions Taken between September 20, 2008- March 30, 2009)Full Depositor GuaranteesDeposit Insurance Coverage IncreasePermanentTemporaryAustria 6/AlbaniaAustraliaDenmarkBelgiumBrazil Germany 1/BulgariaNetherlandsGreece 1/CroatiaNew ZealandHong Kong, SARCyprusSwitzerlandHungary 1/Czech RepublicUkraineIceland 1/EstoniaUnited States 4/Ireland 2/FinlandJordanIndonesia KuwaitKazakhstan MalaysiaLatviaMontenegro 5/LithuaniaMongolia LuxembourgPortugal 1/ MaltaSingapore 1/PhilippinesSlovakiaPolandSlovenia RomaniaTaiwanRussiaThailand 3/Serbia 5/United Arab Emirates SpainSwedenUnited Kingdom20 227Source: "Update on Unwinding Temporary Deposit Insurance Arrangements," Report to the Financial Stability Board, Note by staffs of IADI and IMF, June 2010, and press releases from media and agency websites.
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11. Emergency Deposit Insurance Measures by ContinentSources: "Update on Unwinding Temporary Deposit Insurance Arrangements," Report to the Financial Stability Board, Note by staffs of IADI and IMF, June 2010; The Bank Guarantee Fund (Poland), April 2009; and press releases from media and agency websites.Countries in bold reflect full guarantee measures.
12. The new expanded role of DISFinancial stability is a more complex issue than we thoughtSafety-net should be redesigned → global review of the role of DIS is underway (FSB, EU)Distortions (moral hazard) are NOT arising from existence of DIS (only) → to mitigate them, new techniques (supervisiory and deposit insurance) are needed. Risk consideration and management at all levels of operation (funding and investment)
13. LimitationsHow effectively jurisdictions can resolve the problem of TBTF issue → supervisory oversight, resolution plans, living wills etc. Funding issues under distressed environmentAccess to vast information (from different sources) in time for overall risk assessment Public trust in a concerted and well coordinated crisis resolution or ↓Blanket Guarantee will remain THE alternative at hand?
14. ConclusionsThe unconventional policy measures taken by governments during crisis do not seem to be sustainable Most weaknesses of DIS are stemming from supervisory chauvinism and regulatory short-sitednessThe new enhanced DIS measures are adequate and pointed at the right direction, BUT their implementation is slowGovernments may create bigger moral hazard than DI → who will police them? The key to the elevated role of DI in financial stability is how effectively of TBTF is resolved → Blanket Guarantee should cease to be an automized tool of stabilization
15. Thank you