David S. Hoelscher
November 13-16, 2011
JODHPUR, INDIA

• Evolving Safety Net After Crisis
• Effective Insolvency Regimes
• Institutional Framework for Resolution
• Future for DIA
• Conclusions and Policy Implications

Evolving Safety Net After Crisis
The crisis brought several long term developments into focus :



Financial stability is at the center of policy making
Depositor protection is now sharply higher and will remain so
Risk mitigation responsibility of expanded and strengthened safety net



The three safety net functions must be better integrated
Supervision, depositor protection, problem bank resolution
Less distinction between stable and crisis policies
 The role of deposit insurance in that safety net is changing

Effective Insolvency Regimes
Effective insolvency regime critical to financial stability
Critical elements of effective insolvency
• Early intervention before insolvency
• Speed of intervention/resolution
• Ability to transfer or merger a banks’ operations
• Effective write-down of shareholders
• Protection of on-going business
Benefits of a special bank bankruptcy regime

Resolution of small and medium sized banks
• Ensure adequate and similar tool kit
– P&A
– Bridge bank
– Nationalization as last resort
• Ensure shareholders can be written down
Resolution of systemically important institutions
• Prepare SIFIs for failure
– Contingent capital—bail in creditors
– Living wills
• Difficulties of resolving NBFI
• Special cross border resolution issues
– Ring fencing verses universality
– Need for coordination
– Different insolvency triggers

Institutional Framework for Resolution
Before crisis: agnostic on effective institutional framework
• Policy makers were unsure which agency was best to decide on options
• Different responsibilities of safety net agencies
• Role of deposit insurer varied widely across jurisdictions
After the crisis: some consensus about role deposit insurers
• Deposit insurer given expanding role in case of small and medium banks
– Use of deposit insurance financing generated few objections
– Deposit insurer has more appropriate incentives for deciding resolution options
– Some jurisdictions considering expanded powers
• Safety net partners collaborate to address systemically important firms
– Macro-prudential or systemic oversight joint safety net

Institutional Framework for Resolution
Resolution Authority of Deposit Insurers
(Percent with broad mandate)
2005 2011
Africa 5 60.0% 60.0%
America
Asia
Total
18
77.8%
13
58.3%
Europe 41
41.5%
Middle East 6
50.0%
83
52.4%
94.4%
69.2%
53.7%
50.0%
64.3%

Institutional Framework for Resolution
– Providing guarantees and liquidity support by DIS
• Jurisdictions turned to DIA for funding
• Expansion of authority to provide liquidity, restructure
• Brazil, Germany, Netherlands
– Limited expansion into resolution

DIA Role InBank Resolution
(End 2010)
Payout Supervision Resolution
Argentina
Australia
Brazil
Canada
France
Germany
Hong Kong
India
Indonesia
Italy
Japan
Korea
Mexico
Yes
Yes
Yes
Netherlands Yes
Russia Yes
Singapore
Spain
Yes yes
Switzerland No
Turkey
UK
USA yes
Yes yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
No
No
No
Yes
No
No
No
No
No
Yes
Yes
Yes
No
No
No
No
No
No
No
No
Yes
1/ Mainly provides financing for restructuring/mergers.
2/ A new Act will give DIA role in funding resolution
Yes
Yes
Yes
No 2/
Yes
No
Yes
No
Yes
Yes 1/
Yes
Yes 1/
No
Yes 1/
Yes
Yes
No
No
Yes 1/
Yes 1/
Yes 1/

Future Directions
:
• Immediate goal: greater control over own resources
– Incentive to protect the fund
– Prevent supporting failed banks
• Measureable objective: speedy payout
– Will help identify appropriate resolution options
– Reduce tendency for forbearance
• Appropriate incentives: ability to “cost” resolution options
– Use of resources in resolution measured against payout option

Future Directions
Design implications for expanded resolution role
• Political consensus on importance of insolvency
• Legal and regulatory reforms
• Strengthening funding structures
– Must protect depositor funding
– Government support may be needed
• Better coordination within safety net
– Information sharing
– Coordinated diagnosis and viability assessment
– Agreed triggers
• Staffing to meet expanded skills
– Use of existing resolution tools
– Resolution of NBFIs
• Rules and procedures for systemically important firms

Conclusions and Policy Implications
The changing role of deposit insurance:
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Financial stability a major policy objective for deposit insurance
High protection levels are unlikely to fall
Safety net participants will be more closely coordinate.
The design of deposit insurance systems is changing


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Less concern about moral hazard from high coverage
The mandate of deposit insurance systems are expanding throughout world

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Financing
Choosing restructuring options/least cost
Resolution options should be ranked by cost
Explicit treatment of “too-big-to fail” institutions