E XPANDING R OLE FOR D EPOSIT I NSURER WITHIN C RISIS M ANAGEMENT AND C ROSS B ORDER R ESOLUTIONS David S. Hoelscher

I. Function of Deposit Insurance II. Expanded Role of Deposit Insurance III. Resolution Mandate in the Revised Core Principles IV. Preparing for an Expanded Mandate V. Conclusions 3

F UNCTION OF D EPOSIT I NSURANCE

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Institutional framework varies widely  Authorities design safety nets given local conditions  Role of deposit insurer varies widely across jurisdictions Narrow mandate, paybox systems Only responsible for the reimbursement of insured deposits A “paybox plus” mandate Reimbursement plus a limited role in resolution (funding) A “loss minimizer” mandate Responsible for selection/funding of resolution strategies A “risk minimizer” mandate A full suite of resolution powers and prudential oversight 6

7 Number of Deposit Insurance Systems

Clearer focus on financial stability  Less concern about only protecting unsophisticated depositors  Less concern about moral hazard from high coverage Expanding role in risk analysis and diagnosis  Analysis of banking conditions to complement supervisors  Even a paybox needs an independent evaluation ability  Detailed and early information sharing  Participation in crisis management committees Expanding role in resolution activities (mandates)  Information sharing and coordination  Responsibility for protecting DIA funds  Scenario testing/simulation exercises 9

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DIA Role In Bank Resolution (End 2012) PayoutSupervisionResolution ArgentinaYesNoYes 1/ AustraliaYesNoYes BrazilYesNoYes 1/ CanadaYesNoYes FranceYesNoYes GermanyYes No Hong KongYesNo IndiaYesNoYes 1/ IndonesiaYesNoYes 1/ ItalyYesNoYes 1/ JapanYes KoreaYes MexicoYesNoYes NetherlandsYesNoNo 2/ RussiaYes SingaporeYesNo SpainYesNoYes SwitzerlandYesNo TurkeyyesNoYes UKYesNoYes 1/ USAyesYes 1/ Mainly provides financing for restructuring/mergers. 2/ A new Act will give DIA role in funding resolution 11

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13 DIAs by Mandate: 2013 (In percent of total in each region)

Current Revisions of Core Principles 2014  More prescriptive: ◦ Strengthened guidance on adequacy of coverage ◦ Mandatory ex-ante funding ◦ Seven day payout target  Strengthening governance frameworks  New Crisis Management Core Principle ◦ Emphasize establishment of coordinating framework  More safeguards ◦ Safeguards on use of DI funding in resolution ◦ Strengthened governance standards ◦ Strengthened rule on information sharing ◦ Post mortem review following failures 15

Principle 6 – DEPOSIT INSURER’S ROLE IN CONTINGENCY PLANNING AND CRISIS MANAGEMENT The deposit insurer should have in place effective contingency planning and crisis management policies and procedures to ensure it is able to effectively respond to the risk of bank failures and other events. The development of system-wide crisis preparedness strategies and management policies should be the joint responsibility of all safety-net participants. Elements of compliance  Contingency planning and crisis management procedures  Regular testing of plans  Member of any interagency coordination agency  participates in the development of pre- and post-crisis management communication plans 16

Principle 5 – CROSS-BORDER ISSUES Where there is a material presence of foreign banks in a jurisdiction, formal information sharing and coordination arrangements should be in place. Elements of compliance  Formal information sharing, coordination arrangements exist  Agreements determine how responsibilities shared 17

Principle 14 – FAILURE RESOLUTION An effective failure-resolution regime should enable the deposit insurer to provide for protection of depositors and contribute to financial stability. The legal framework should include a special resolution regime. Elements of compliance  The DIA has operational independence and sufficient resources  The resolution regime has a broad range of powers, options  Objectives, mandates, and powers among agencies are clear  Resolution decisions cannot be reversed by legal action 18

Preparing for an Expanded Mandate

Essential Reforms for Expanded Mandate Political consensus on strengthening deposit insurance systems Strengthen coordination within safety net ◦ Develop information sharing protocols ◦ Engage with other safety net players on a regular basis Strengthen diagnostic capacity (even paybox) ◦ Develop systematic analysis of banking system ◦ Develop early warning systems ◦ Coordinate diagnosis and viability assessment with other agencies Strengthening funding structures ◦ Must protect depositor funding ◦ Government support may be needed Staffing to meet expanded skills 20

Conclusions

The changing role of deposit insurance Financial stability a major policy objective for deposit insurance The deposit insurer has a growing role in maintaining stability Safety net participants will coordinate more closely Funding is at risk (even for paybox) With changing role, come changing responsibilities ◦ Need for a strong analytic capacity ◦ Need to understand resolution tools (even paybox) 22