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Deposit Insurers ’ Response to Financial Crisis Andras Fekete-Gyor

Deposit Insurers ’ Response to Financial Crisis Andras Fekete-Gyor. Role of Deposit Insurance in Bank Resolution Framework – Lessons from the Financial Crisis November 13-16, 2011 JODHPUR , INDIA. Outline. Di f ferencies in policy mix Weaknesses of depositor protection

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Deposit Insurers ’ Response to Financial Crisis Andras Fekete-Gyor

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  1. DepositInsurers’ Responseto Financial CrisisAndrasFekete-Gyor Role of Deposit Insurance in Bank Resolution Framework – Lessons from the Financial Crisis November 13-16, 2011 JODHPUR, INDIA

  2. Outline • Differencies in policy mix • Weaknesses of depositor protection Jurisdictions that Enhanced Deposit Insurance Protection • Measures towards enhanced depositor protection Actions Taken to Increase Deposit Insurance Emergency Deposit Insurance Measures by Continent • The new role of DIS expanded • Limitations • Conclusions

  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 markets • Direct asset purchases • Public guarantees behind troubled non-banking assets and/or banks • Quantitative Easings Are these measures sustainableinterms of financialstability?

  5. 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 harmonizedcross-borderaction(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

  6. Measures towards enhanced depositor protection • Relatively small number of failures with involvement of DIS (government supportinstead) • 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-offabolished; fast payout; SCV files

  7. Jurisdictions that Enhanced Deposit Insurance Protection 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.

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

  9. Emergency Deposit Insurance Measures by Continent Sources: "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.

  10. The newexpandedrole of DIS • Financial stability is a more complex issuethanwethought • Safety-netshould be redesigned→ global review of the role of DIS is underway (FSB, EU) • Distortions (moral hazard) are NOT arising from existence of DIS (only)→ tomitigatethem, newtechniques (supervisiory and depositinsurance) areneeded. • Riskconsideration and management atalllevels of operation (funding and investment)

  11. 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) intimefor overall risk assessment • Public trust in a concerted and well coordinated crisis resolutionor ↓ BlanketGuaranteewillremain THE alternativeathand?

  12. 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

  13. Thankyou

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