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Cross-Border Deposit Insurance:Burden Sharing & System Design
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General Principles: Deposit Insurance
The Goals of Deposit Insurance: Contribute to systemic stability Protect small depositors from catastrophic loss
Deposit Insurance Helps Achieve Goals By Reduction of incentives to withdraw deposits Maintenance of liquidity in banking system Supporting availability of credit in system Facilitating payments and settlement process
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General Principles: Deposit Insurance
National Goals May Differ – But Tradeoffs are Necessary: Role of banking system v. other businesses Role of safety net v. supervision Moral hazard v. protection from loss Explicit v. implicit guarantees Prefunded v. unfunded or funding as needed
With Defined Goals - How do You Achieve Them? System Design is Crucial – Choices should reflect your goals How is it funded? Role of Deposit Insurer? What are the coverage limits? Who is insured – which banks and which accounts? How are risks controlled?
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Cross-Border Deposit Insurance: Cross-Border Crisis Management
Crisis management:
Spectrum from Supervision Intervention & Insolvency
Cross-Border Crises Introduce New Complexities:
Absence of International Norms• National Law, EU Insolvency Regulation, Other Agreements
Inconsistent national laws Diverse regulatory infrastructures, jurisdictions, &
practices Diverse processes for crisis management & insolvency Diverse central bank practices and policies Diverse deposit insurance systems
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Cross-Border Deposit Insurance: Cross-Border DifferencesDifferences often exist on a variety of key issues:• Types of accounts covered • Maximum limits of coverage • Funding for the system - Public or Private Fund? Ex ante/Ex post?• Speed of payment to insured depositors
• International Average is 9.6 months!
• Public confidence in deposit insurance guarantee
Additional Issues That Affect Deposit Insurance Guarantees:• Role of Deposit Insurer• Triggers for Intervention?• Philosophy of Bank Resolution – bail-out or limited protection?• Possible Bank Resolution Structures – Bridge Banks or Liquidation?
• Most countries cannot use a bridge or similar continuity structure.
• How the insolvency process is administered
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Cross-Border Deposit Insurance: Home & Host IssuesCross-Border Differences Increase Complexity
Who Bears the Burden of Funding Any Resolution Will Affect the Solution Chosen
• Burden Sharing Issues involve:• Primary Supervisory Responsibility
• Emergency Liquidity Assistance
• Which country bears responsibility to cover depositors?
• Responsibility for structuring/arranging any resolution
• Principal Factors Determining Who Bears Burden?• Corporate structures – branch or subsidiary
• Governing rules – EU Directives? Others?
• Systemic Significance?
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Cross-Border Deposit Insurance: Issues for Deposit Insurers
• Deposit Insurance is Only 1 Aspect of National Systems for Crisis Resolution • ELA, Public Funding Liability, etc. also affect national
decisions
• Consequences of Being the Home or Host? • Primary supervisor – effective & timely intervention?
• Availability of information – host usually at disadvantage, but . . .
• Legal & regulatory powers and infrastructure – what will home do?
• Whose law governs? Corporate form may control
• Response to systemically significant institutions
• Systemic in Home, Host, or both?
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Home Country Host Country
Branch(in Host)
Sub(in Host)
Branch Sub
Primary Supervisor
Consolidated Supervisor
With Consolidated Supervisor
Lender of Last Resort ? ?
Systemic to You?
Deposit Insurance ?
U.S. coverage?
?Maybe?
Resolution Authority ? ?
These Differences Affect . . . Home & Host Incentives
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Cross-Border Deposit Insurance: Questions for Deposit InsurersAs Home Country . . .• Home Bank – Branch in Host
• Will your banks/public support payment for host depositors?
• If not, how will that affect cooperation?
• Not Systemic in Your Country, but Systemic in Host Country?
• Home Bank – Sub in Host• Will Host Country provide DI
Coverage? ELA?
• Will Host, cooperate in crisis management?
• Do you understand Host’s likely response to Home Bank’s troubles?
As Host Country . . .• For Foreign Branch
• Can you rely on coverage by Home Country’s DI?
• Will you have adequate information to assess risk?
• Do you know how Home Country law triggers and conducts crisis management?
• For Foreign Subsidiary • Will you be able to assess overall
bank risk?
• Will you provide full coverage for subsidiary’s depositors?
• What will be likely actions in crisis by Home Country? What are the consequences for your system?
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Cross-Border Deposit Insurance: Practical Consequences
Past Experience does not guarantee Future Results, But
For U.S. Banks • Prompt corrective action allows supervisory
intervention & trigger for resolution• Depositors get prompt access to insured deposits• Universal resolution process, but Host conflicts
remain – foreign ring-fencing is likely• Why? FDIC does not cover most Host Country
deposits• Prospects for Cooperation with Host Country?
• Possible accommodation for host country depositors?
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Cross-Border Deposit Insurance: Practical ConsequencesFor European Union Banks – Are the problems solved?• EU requires DI with payment “within three months”• National law still governs funding, coverage,
insolvency process, “triggers”, etc.• Significant differences between countries• Systemic in home, host, or both?• Which country pays? Sub or Branch? Incentives?• Likely resolution process remains government
assistance through “Administration.” Why?• European Company Law – Future implications?• The Future: More consistent EU insolvency laws,
EU deposit insurer, or EU crisis management agency?
