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Role of Deposit Insurance in Bank Resolution Framework – Lessons from the Financial Crisis

Role of Deposit Insurance in Bank Resolution Framework – Lessons from the Financial Crisis Session 
III
 – 
Lessons 
from
 Financial
 Crisis 
for
 Bank
 Resolution:
 US 
and 
European
 Experience Jerzy Pruski – President of the Bank Guarantee Fund. J odhpur , INDIA , 14 th November 2011.

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Role of Deposit Insurance in Bank Resolution Framework – Lessons from the Financial Crisis

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  1. Role of Deposit Insurance in Bank Resolution Framework – Lessons from the Financial Crisis Session
III
–
Lessons
from
Financial
Crisis
for
Bank
Resolution:
US
and
European
Experience Jerzy Pruski – President of the Bank Guarantee Fund Jodhpur,INDIA, 14th November 2011

  2. Market experience regarding resolution 13-16th November 2011 2

  3. Market experiences Financial crisis2008 USA Systemic organization of the small bank market 1933 First experiences regarding resolution of big banks Asia Gaining significant experience regarding resolution of big banks 1997 Lack of any institutional solutions Europe First institutional solutions come into existence Lack of any institutional solutions Gaining limited experience 13-16th November 2011 3

  4. Jurisdiction of FDIC FDIC mitigates the risk of instability in ¾ of the banking sector due to the number of banks • State banks • Mainly under FDIC supervision • A large number of small entities active on local markets • 73% of banks in the USA accounting for 30% of total assets within the sector 13-16th November 2011

  5. Applying acquired experience to bigger banks 2 932 banks Total assets in bn $ Największe banki stanowe (pod nadzorem FDIC) Significance of practical capabilities of FDIC Washington Mutual in terms of asset volume was comparable to the biggest banks on the market FDIC possesses both competence and tools with respect to resolution The WM case demonstrated the capacity of using these tools with respect to a big financial institution Resolution średnie aktywa 0,9 mld $ 36,6% GDP Position of Washington Mutual 1,0% PKB USA The example of Washington Mutual demonstrates the capacity to apply the experience gained from dealing with small banks to measures directed towards significant market players 5 13-16th November 2011 5

  6. Risks connected with the structure of the banking sector European examples 13-16th November 2011 6

  7. Need for resolution in the EU In Europe there is a need to create tools regulating fractionalized sectors and mitigating risk introduced by big banks 2010 2010 Resolution tools needed due to the large number of small banks There is a need for solutions that neutralize the risk of market destabilization by big banks 13-16th November 2011

  8. Europe – challenges regarding the gradual development of resolution Number of banks – 2010 >500 banks Limited motivation to create resolution for small banks In Europe there are barriers to the gradual development of resolution based on tools that can be used with respect to small banks • European bank systems are highly diversified • In many countries there is strong motivation to create resolution for small banks – it enables a gradual building up of competencies regarding resolution (similar to FDIC) • Differences between sectors create significant barriers in harmonization of solutions 13-16th November 2011

  9. Cross-border problems European examples 13-16th November 2011 9

  10. The importance of the SIFI problem 0 1000 2000 3000 4000 5000 6000 7000 USA EUR bn UK France Japan China Germany Italy Europe Switzerland Northern America Spain Asia Netherlands Other Australia Belgium Canada Sweden The SIFI problem is particularly pronounced in Europe 40 largest World banks by assets to GDP Largest banks by assets 0% 50% 100% 150% 200% 250% 300% 350% 400% Switzerland UK Assets/GDP France Belgium Netherlands Sweden Australia Spain Europe Italy Northern America Asia Germany Other Japan Canada USA China Source: "Forbes Global 2000" rank, consisting of 40 largest world banks - 2009 13-16th November 2011 10

  11. Risk of transferring country risk to the banking sector Bank risk is connected with country risk Italy – changes to bank CDS and country CDS over time Italy – correlation of bank CDS and country CDS 13-16th November 2011 11

  12. Europe – the financial aspect of cross-border problems The picture of cross-border problems on the example of the need for European bank recapitalization 13-16th November 2011 12

  13. www.bfg.pl 13-16th November 2011 13

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