Global Practices in Bank Resolution David S. Hoelscher Role of Deposit Insurance in Bank Resolution Framework – Lessons from the Financial Crisis November 13-16, 2011 JODHPUR, INDIA

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

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 Evolving Safety Net After Crisis

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 Effective Insolvency Regimes

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

Expanded mandate Expanded role in countries most affected by crisis Emergency measures adopted: – 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

Institutional Framework for Resolution

Future Directions The role of deposit insurers in resolution will evolve: 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

The changing role of deposit insurance:  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  Less concern about moral hazard from high coverage  The mandate of deposit insurance systems are expanding throughout world  Financing  Choosing restructuring options/least cost  Resolution options should be ranked by cost  Explicit treatment of “too-big-to fail” institutions Conclusions and Policy Implications