Cross-Border Deposit Insurance: Burden Sharing

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Cross-Border Deposit InsuranceBurden Sharing
System Design
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General Principles Deposit Insurance

• The Goals of Deposit Insurance
• Contribute to systemic stability
• Protect small depositors from catastrophic loss
• Deposit Insurance Helps Achieve Goals By
• Reduction of incentives to withdraw deposits
• Maintenance of liquidity in banking system
• Supporting availability of credit in system
• Facilitating payments and settlement process

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General Principles Deposit Insurance

• National Goals May Differ But Tradeoffs are
  Necessary
• Role of banking system v. other businesses
• Role of safety net v. supervision
• Moral hazard v. protection from loss
• Explicit v. implicit guarantees
• Prefunded v. unfunded or funding as needed
• With Defined Goals - How do You Achieve Them?
• System Design is Crucial Choices should reflect
  your goals
• How is it funded?
• Role of Deposit Insurer?
• What are the coverage limits?
• Who is insured which banks and which accounts?
• How are risks controlled?

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Cross-Border Deposit Insurance Cross-Border
Crisis Management

• Crisis management
• Spectrum from Supervision Intervention
  Insolvency

• Cross-Border Crises Introduce New Complexities
• Absence of International Norms
• National Law, EU Insolvency Regulation, Other
  Agreements
• Inconsistent national laws
• Diverse regulatory infrastructures,
  jurisdictions, practices
• Diverse processes for crisis management
  insolvency
• Diverse central bank practices and policies
• Diverse deposit insurance systems

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Cross-Border Deposit Insurance Cross-Border
Differences

• Differences often exist on a variety of key
  issues
• Types of accounts covered
• Maximum limits of coverage
• Funding for the system - Public or Private Fund?
  Ex ante/Ex post?
• Speed of payment to insured depositors
• International Average is 9.6 months!
• Public confidence in deposit insurance guarantee
• Additional Issues That Affect Deposit Insurance
  Guarantees
• Role of Deposit Insurer
• Triggers for Intervention?
• Philosophy of Bank Resolution bail-out or
  limited protection?
• Possible Bank Resolution Structures Bridge
  Banks or Liquidation?
• Most countries cannot use a bridge or similar
  continuity structure.
• How the insolvency process is administered

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Cross-Border Deposit Insurance Home Host
Issues

• Cross-Border Differences Increase Complexity
• Who Bears the Burden of Funding Any Resolution
  Will Affect the Solution Chosen
• Burden Sharing Issues involve
• Primary Supervisory Responsibility
• Emergency Liquidity Assistance
• Which country bears responsibility to cover
  depositors?
• Responsibility for structuring/arranging any
  resolution
• Principal Factors Determining Who Bears Burden?
• Corporate structures branch or subsidiary
• Governing rules EU Directives? Others?
• Systemic Significance?

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Cross-Border Deposit Insurance Issues for
Deposit Insurers

• Deposit Insurance is Only 1 Aspect of National
  Systems for Crisis Resolution
• ELA, Public Funding Liability, etc. also affect
  national decisions
• Consequences of Being the Home or Host?
• Primary supervisor effective timely
  intervention?
• Availability of information host usually at
  disadvantage, but . . .
• Legal regulatory powers and infrastructure
  what will home do?
• Whose law governs? Corporate form may control
• Response to systemically significant institutions
• Systemic in Home, Host, or both?

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These Differences Affect . . . Home Host
Incentives
Home Country Home Country Host Country Host Country
Branch (in Host) Sub (in Host) Branch Sub
Primary Supervisor Consolidated Supervisor With Consolidated Supervisor
Lender of Last Resort ? ? Systemic to You?
Deposit Insurance ? U.S. coverage? ? Maybe?
Resolution Authority ? ?
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Cross-Border Deposit Insurance Questions for
Deposit Insurers

• As Home Country . . .
• Home Bank Branch in Host
• Will your banks/public support payment for host
  depositors?
• If not, how will that affect cooperation?
• Not Systemic in Your Country, but Systemic in
  Host Country?
• Home Bank Sub in Host
• Will Host Country provide DI Coverage? ELA?
• Will Host, cooperate in crisis management?
• Do you understand Hosts likely response to Home
  Banks troubles?

• As Host Country . . .
• For Foreign Branch
• Can you rely on coverage by Home Countrys DI?
• Will you have adequate information to assess
  risk?
• Do you know how Home Country law triggers and
  conducts crisis management?
• For Foreign Subsidiary
• Will you be able to assess overall bank risk?
• Will you provide full coverage for subsidiarys
  depositors?
• What will be likely actions in crisis by Home
  Country? What are the consequences for your
  system?

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Cross-Border Deposit Insurance Practical
Consequences

• Past Experience does not guarantee Future
  Results, But
• For U.S. Banks
• Prompt corrective action allows supervisory
  intervention trigger for resolution
• Depositors get prompt access to insured deposits
• Universal resolution process, but Host conflicts
  remain foreign ring-fencing is likely
• Why? FDIC does not cover most Host Country
  deposits
• Prospects for Cooperation with Host Country?
• Possible accommodation for host country
  depositors?

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Cross-Border Deposit Insurance Practical
Consequences

• For European Union Banks Are the problems
  solved?
• EU requires DI with payment within three months
• National law still governs funding, coverage,
  insolvency process, triggers, etc.
• Significant differences between countries
• Systemic in home, host, or both?
• Which country pays? Sub or Branch? Incentives?
• Likely resolution process remains government
  assistance through Administration. Why?
• European Company Law Future implications?
• The Future More consistent EU insolvency laws,
  EU deposit insurer, or EU crisis management
  agency?

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Thank You!Michael KrimmingerFederal Deposit
Insurance CorporationWashington,
D.C.mkrimminger_at_fdic.gov