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Functional Approach to Regulation General Principles

Functional Approach to Regulation General Principles. For financial regulation to c ontribute to financial stability , it must avoid moral hazard and allow institutions to fail preserve functions that are systemically important

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Functional Approach to Regulation General Principles

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  1. Functional Approach to Regulation General Principles • For financial regulation to contribute to financial stability, it must • avoid moral hazard and allow institutions to fail • preserve functions that are systemically important • These principles should guide the design of deposit protection arrangements EBK / CFB / SFBC

  2. Objectives • Properly designed deposit protection arrangements will • Reduce the risk of bank runs • Reduce the risk of political pressure to save an insolvent bank • Promote the rapid transfer of systemically important deposit taking through replacement or detachment • Reduce the systemic effects of insolvency through exante or ex post measures (e.g., set-off, market structure measures, safety-net) • Acknowledge differences in regulatory design across countries EBK / CFB / SFBC

  3. Cross-border Implications • In order to achieve the objectives is it necessary to protect • Deposits in local and foreign currencies? • Deposits held by residents and non-residents? • Deposit at domestic banks and domestic branches of foreign banks? • Deposits at foreign branches of domestic banks? EBK / CFB / SFBC

  4. The Challenge – Foreign Branch Deposits • Administration of system (assessment of premia, etc.) • Differential treatment of home/host depositors • Coverage by home country • Systemic relevance of foreign branch deposit taking function? • Capacity of home country deposit insurer? • Coverage by host country • Reliance on home country supervision? • High recovery costs EBK / CFB / SFBC

  5. Cross-border Cooperation • Acknowledge home/host country interests • Primary concern for stability of the domestic financial system • Resulting information needs • Acknowledge limitations of domestic deposit insurance schemes • Achieve level playing field by agreeing on comparable coverage limits, insurance premium, topping-up arrangements, etc. EBK / CFB / SFBC

  6. Conclusion • Design a deposit protection regulation to permit failure of the bank and to preserve systemically important functions • Whether deposit-taking is systemically significant depends on the structure of the financial industry • Acknowledge national incentives – primary concern for stability of the domestic financial system • Forge agreement on division of tasks between home/ host deposit insurer that is incentive compatible EBK / CFB / SFBC

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