Global Practices in Bank Resolution David S. Hoelscher

1. Global Practices in Bank ResolutionDavid S. Hoelscher Role of Deposit Insurance in Bank Resolution Framework – Lessons from the Financial Crisis November 13-16, 2011 JODHPUR, INDIA

2. Outline • Evolving Safety Net After Crisis • Effective Insolvency Regimes • Institutional Framework for Resolution • Future for DIA • Conclusions and Policy Implications

3. Evolving Safety Net After Crisis The crisis brought several long term developments into focus: • Financial stability is at the center of policy making • Depositor protection is now sharply higher and will remain so • Risk mitigation responsibility of expanded and strengthened safety net • The three safety net functions must be better integrated • Supervision, depositor protection, problem bank resolution • Less distinction between stable and crisis policies • The role of deposit insurance in that safety net is changing

4. Effective Insolvency Regimes Effective insolvency regime critical to financial stability Critical elements of effective insolvency • Early intervention before insolvency • Speed of intervention/resolution • Ability to transfer or merger a banks’ operations • Effective write-down of shareholders • Protection of on-going business Benefits of a special bank bankruptcy regime

5. Effective Insolvency Regimes Resolution of small and medium sized banks • Ensure adequate and similar tool kit • P&A • Bridge bank • Nationalization as last resort • Ensure shareholders can be written down Resolution of systemically important institutions • Prepare SIFIs for failure • Contingent capital—bail in creditors • Living wills • Difficulties of resolving NBFI • Special cross border resolution issues • Ring fencing verses universality • Need for coordination • Different insolvency triggers

6. Institutional Framework for Resolution Before crisis: agnostic on effective institutional framework • Policy makers were unsure which agency was best to decide on options • Different responsibilities of safety net agencies • Role of deposit insurer varied widely across jurisdictions After the crisis: some consensus about role deposit insurers • Deposit insurer given expanding role in case of small and medium banks • Use of deposit insurance financing generated few objections • Deposit insurer has more appropriate incentives for deciding resolution options • Some jurisdictions considering expanded powers • Safety net partners collaborate to address systemically important firms • Macro-prudential or systemic oversight joint safety net

7. Institutional Framework for Resolution

8. Institutional Framework for Resolution Expanded mandate • Expanded role in countries most affected by crisis • Emergency measures adopted: • Providing guarantees and liquidity support by DIS • Jurisdictions turned to DIA for funding • Expansion of authority to provide liquidity, restructure • Brazil, Germany, Netherlands • Limited expansion into resolution

9. Institutional Framework for Resolution

10. Future Directions The role of deposit insurers in resolution will evolve: • Immediate goal: greater control over own resources • Incentive to protect the fund • Prevent supporting failed banks • Measureable objective: speedy payout • Will help identify appropriate resolution options • Reduce tendency for forbearance • Appropriate incentives: ability to “cost” resolution options • Use of resources in resolution measured against payout option

11. Future Directions Design implications for expanded resolution role • Political consensus on importance of insolvency • Legal and regulatory reforms • Strengthening funding structures • Must protect depositor funding • Government support may be needed • Better coordination within safety net • Information sharing • Coordinated diagnosis and viability assessment • Agreed triggers • Staffing to meet expanded skills • Use of existing resolution tools • Resolution of NBFIs • Rules and procedures for systemically important firms

12. Conclusions and Policy Implications The changing role of deposit insurance: • Financial stability a major policy objective for deposit insurance • High protection levels are unlikely to fall • Safety net participants will be more closely coordinate. The design of deposit insurance systems is changing • Less concern about moral hazard from high coverage • The mandate of deposit insurance systems are expanding throughout world • Financing • Choosing restructuring options/least cost • Resolution options should be ranked by cost • Explicit treatment of “too-big-to fail” institutions