Functional Approach to Regulation General Principles

1
Functional Approach to Regulation General
Principles

• For financial regulation to contribute to
  financial stability, it must
• avoid moral hazard and allow institutions to fail
• preserve functions that are systemically
  important
• These principles should guide the design of
  deposit protection arrangements

2
Objectives

• Properly designed deposit protection arrangements
  will
• Reduce the risk of bank runs
• Reduce the risk of political pressure to save an
  insolvent bank
• Promote the rapid transfer of systemically
  important deposit taking through replacement or
  detachment
• Reduce the systemic effects of insolvency through
  ex ante or ex post measures (e.g., set-off,
  market structure measures, safety-net)
• Acknowledge differences in regulatory design
  across countries

3
Cross-border Implications

• In order to achieve the objectives is it
  necessary to protect
• Deposits in local and foreign currencies?
• Deposits held by residents and non-residents?
• Deposit at domestic banks and domestic branches
  of foreign banks?
• Deposits at foreign branches of domestic banks?

4
The Challenge Foreign Branch Deposits

• Administration of system (assessment of premia,
  etc.)
• Differential treatment of home/host depositors
• Coverage by home country
• Systemic relevance of foreign branch deposit
  taking function?
• Capacity of home country deposit insurer?
• Coverage by host country
• Reliance on home country supervision?
• High recovery costs

5
Cross-border Cooperation

• Acknowledge home/host country interests
• Primary concern for stability of the domestic
  financial system
• Resulting information needs
• Acknowledge limitations of domestic deposit
  insurance schemes
• Achieve level playing field by agreeing on
  comparable coverage limits, insurance premium,
  topping-up arrangements, etc.

6
Conclusion

• Design a deposit protection regulation to permit
  failure of the bank and to preserve systemically
  important functions
• Whether deposit-taking is systemically
  significant depends on the structure of the
  financial industry
• Acknowledge national incentives primary concern
  for stability of the domestic financial system
• Forge agreement on division of tasks between
  home/ host deposit insurer that is incentive
  compatible