Regulators’ Response: Crisis Framework by John Bovenzi Role of Deposit Insurance in Bank Resolution Framework – Lessons from the Financial Crisis November 13-16, 2011 JODHPUR, INDIA

Table of Contents Key Factors Leading to the Crisis Erosion of regulatory standards Structural weaknesses Today’s Policy Agenda Strengthen supervision and regulation Address systemic risk Looking Forward

Key Factors Leading to the Crisis: Erosion of Regulatory Standards Weak Capital Standards/High Leverage Amounts, quality and cyclicality of capital Weak Liquidity Standards High levels of uninsured short-term funding susceptible to panic Deposit insurance is a necessary, but not a sufficient condition Weak Underwriting Standards Low down payments, weak documentation, etc. fuel excessive lending and housing bubble Consumer, business and government debt levels Fuels boom-to-bust cycles

Key Factors Leading to the Crisis: Structural Weaknesses Complexity, Lack of Transparency Lack of trust contributes to panic Inability to differentiate between institutions New market instruments contribute to the downward spiral in the value of collateral once the bubble bursts Gaps in Financial Regulatory Oversight Shadow banking system – MMMFs, SIVs, etc. Interdependencies/Systemic risk

Today’s Policy Agenda (1) Strengthen Bank Supervision/Regulation Capital standards, Liquidity standards Volcker rule Consumer/Investor protection Address Systemic Risk Systemic risk regulator Higher regulatory standards for SIFIs Develop effective bank resolution mechanisms Better cross border coordination Central clearing houses for OTC derivatives

Today’s Policy Agenda (2) Enhance Market Discipline Greater transparency End Too-Big-To-Fail Housing Reform? Government support for Fannie/Freddie Loan Modifications/ Foreclosures

Looking Forward We are at the early stages of financial reform implementation – unclear whether long-term or short-term perspectives will prevail There will be many unintended consequences as reform measures are implemented One likely result will be a smaller, more expensive, financial system Financial crises will remain a fact of life Regulators will need sufficient authority and flexibility to deal with these events