Deposit Insurers’ Response to Financial Crisis

Andras Fekete-GyorRole of Deposit Insurance in Bank Resolution Framework –

Lessons from the Financial CrisisNovember 13-16, 2011

JODHPUR, INDIA

Outline• Differencies in policy mix • Weaknesses of depositor protection

Jurisdictions that Enhanced Deposit Insurance Protection

• Measures towards enhanced depositor protectionActions Taken to Increase Deposit Insurance

Emergency Deposit Insurance Measures by Continent• The new role of DIS expanded• Limitations• Conclusions

Motto: Deposit insurers are main benefiters of financial crisis

Differencies in policy mix

In comparison with previous crisis:• Provision of vast liquidity to the markets• Direct asset purchases • Public guarantees behind troubled non-

banking assets and/or banks• Quantitative Easings

Are these measures sustainable in terms of financial stability?

Weaknesses of depositor protection

• No depositor protection at all → DI proliferates rapidly in the aftermath of crisis

• Lack of convergence → system design varies across the globe

• Lack of harmonized cross-border action (Iceland)• Post-funded systems → may not work under distress• Large 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

Measures towards enhanced depositor protection

• Relatively 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

Jurisdictions that Enhanced Deposit Insurance Protection

Full GuaranteePermanent IncreaseTemporary Increase

▄▄▄Full GuaranteePermanent IncreaseTemporary Increase

▄▄▄

IADI: 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.

Actions Taken to Increase Deposit Insurance (Categorizations Based on Initial Actions Taken between September 20, 2008- March 30, 2009)

Full Depositor GuaranteesDeposit Insurance Coverage Increase

Permanent TemporaryAustria 6/ Albania AustraliaDenmark Belgium Brazil Germany 1/ Bulgaria NetherlandsGreece 1/ Croatia New ZealandHong Kong, SAR Cyprus SwitzerlandHungary 1/ Czech Republic UkraineIceland 1/ Estonia United States 4/Ireland 2/ FinlandJordan Indonesia Kuwait Kazakhstan Malaysia LatviaMontenegro 5/ LithuaniaMongolia LuxembourgPortugal 1/ MaltaSingapore 1/ PhilippinesSlovakia PolandSlovenia RomaniaTaiwan RussiaThailand 3/ Serbia 5/United Arab Emirates Spain

SwedenUnited Kingdom

20     22 7

Source: "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.

Emergency Deposit Insurance Measures by ContinentDate Measure

Taken or Announced

Europe Asia Middle East Western Hemisphere

20-Sep-08 I reland2-Oct-08 Greece*3-Oct-08 UK USA5-Oct-08 Germany*6-Oct-08 Denmark, I celand* , Spain,

Sweden7-Oct-08 Eurpean Union, Belgium, Czech

Republic, The NetherlandsTaiwan

8-Oct-08 Austria, Cyprus, Finland, Hungary* , Lithuania, Romania, Slovania

9-Oct-08 Bulgaria, Estonia, Malta10-Oct-08 Kazakhstan12-Oct-08 Portugal* Australia, New

ZealandUnited Arab Emirates

13-Oct-08 Croatia, Latvia, Poland Indonesia14-Oct-08 Russia Hong Kong, SAR15-Oct-08 Switzerland, Ukraine16-Oct-08 Malaysia,

Singapore*17-Oct-08 Luxembourg21-Oct-08 Philippines23-Oct-08 J ordan24-Oct-08 Slovakia Thailand26-Oct-08 Kuwait28-Oct-08 Montenegro25-Nov-08 Mongolia26-Dec-08 Serbia12-Mar-09 Albania

Mar-09 BrazilSources: "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.

The new expanded role of DIS

• Financial stability is a more complex issue than we thought

• Safety-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)

Limitations• How effectively jurisdictions can resolve the problem of

TBTF issue → supervisory oversight, resolution plans, living wills etc.

• Funding issues under distressed environment• Access 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?

Conclusions

• The 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-sitedness

• The new enhanced DIS measures are adequate and pointed at the right direction, BUT their implementation is slow

• Governments 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

Thank you