Hiroyuki Obata Deputy Governor Deposit Insurance Corporation of Japan Role of Deposit Insurance in Bank Resolution Framework – Lessons from the Financial Crisis November 13-16, 2011 JODHPUR, INDIA

Today’s Topics I.Introduction II.Big Picture III. Lessons from the Financial Crisis IV. Conclusion 2

I. Introduction 1.Sovereign risks in Europe (Greece, Italy) 2.No Too Big To Fail financial institutions =>G-SIFIs: strengthened supervision, additional capital requirements 3. Failure of MF Global Holdings 3

II. Big Picture Three Issues 1.Subprime to sovereign debt 2.Starting locally but global impact 3.Confidence in government at stake 4

II. Big Picture 1. Subprime to Sovereign Debt 1 st stage: subprime mortgage crisis in the U.S. 2 nd stage: sovereign debt crisis in Europe 5

II. Big Picture 2. Starting locally but global impact Subprime mortgage crisis in the U.S. had impacts not only financial institutions in the U.S. but also in Europe. European sovereign debt crisis saw bankruptcy of MF Global Holdings in the U.S. 6

II. Big Picture 2. Starting Locally but global impact As for real economy, more impact on export reliant countries than the U.S. or Europe. Export (% change from preceding period) Source: United Nations

II. Big Picture 2. Starting Locally but global impact Distress of European banks could lead to pulling out of their money from developing countries Bank Claims On Developing Countries Source: BIS, International Bank Claims (24 countries)

II. Big Picture 3. Confidence in Government at Stake Rescue plan for Greece was agreed; however, there remains uncertainty regarding its implementation Italy was placed under IMF surveillance 9

III. Lessons from the Financial Crisis 1.Macro economic role for deposit insurance system 2.Deposit insurance system without government money 3. International cooperation and coordination 10

III. Lessons from the Financial Crisis 1. Macro economic role for deposit insurance system Protection of Depositors (microeconomic role) + Stability of the financial system (macroeconomic role) 11

III. Lessons from the Financial Crisis 1. Macro economic role for deposit insurance system Strengthening of deposit insurance system Division of labor and cooperation among safety-net players Japan’s experience 12

III. Lessons from the Financial Crisis 2. Deposit insurance system without government money Shaky confidence in government could mean no public money for bank resolutions in time of crisis. Reinforcement of deposit insurance fund => Ex-ante collection of premiums => Targeting fund level => Premium rates Living will => No Too Big To Fail financial institutions Japan’s experience 13

III. Lessons from the Financial Crisis 3. International Cooperation and Coordination Cross-border cooperation is necessary to deal with globalized financial system Coordination and harmonization of deposit insurance system is essential to prevent cherry- picking Japan’s experience 14

IV. Conclusion Greater role is expected for the deposit insurer as one of the safety-net players IADI has much to do to promote cooperation and harmonization of the deposit insurance system globally. 15