1 Role Played by Deposit Insurance in Global Financial Crisis IADI- Africa Region Committee Conference on Benefits of Deposit Insurance in Africa Arusha, Tanzania 30 July 2010 Vijay Deshpande Office of International Affairs FDIC- USA

2 Outline I.Key missions and mandates of Deposit Insurance Systems (DIS) II.Overview of Global Financial Crisis III.DIS Response to the crisis IV.Lessons Learned

3 I. Mandates/Missions  Protect (small) depositors  Contribute to financial stability  Preserve confidence in the banking system

4 Copyright 1931 by The Chicago Tribune

5 I. Mandates/Missions (cont…)  Also: Promote competitionPromote competition Promote economic developmentPromote economic development Limit moral hazardLimit moral hazard Promote market disciplinePromote market discipline

6 Key Assumptions or Prerequisites Key Assumptions or Prerequisites  Coordination, communication, cooperation, and information sharing among all safety-net players. Ministry of Finance Central Bank Deposit Insurance Organization Bank Supervisor/ Regulator

7 II. Global Financial Crisis: (Systemic Crisis)  Typical scenarios- varied by countries Stressed residential and commercial real estate marketsStressed residential and commercial real estate markets Rising number of problem institutions and failed banksRising number of problem institutions and failed banks Weak financial/ banking sector: liquidity crisis; high charge-offs; credit losses; credit unavailabilityWeak financial/ banking sector: liquidity crisis; high charge-offs; credit losses; credit unavailability Drain on DI systems and depletion of DI fundsDrain on DI systems and depletion of DI funds Overall: lack of public trust in financial sector and risk of instability.

8 Causes of Recent Bank Failures in the U.S.  Significant commercial real estate concentration  Rapid growth fueled by non-core deposits  Poor liquidity management  Underfunded loan and lease loss reserve  Inappropriate incentive compensation programs  Sub-prime lending Inadequate risk management controls and insufficient board/senior management oversight

9 US Experience 1.Temporary increase in DI from $100,000 to $250,000 (until 31 Dec. 2013) 2.FDIC’s Temporary Liquidity Guarantee Program  Transaction Account Guarantee Program Primarily business checking accountsPrimarily business checking accounts Full coverage (guarantee) of non interest-bearing deposit transaction accountsFull coverage (guarantee) of non interest-bearing deposit transaction accounts  Debt Guarantee Program Help support banking system liquidityHelp support banking system liquidity Provided guarantees on senior unsecured debt with fixed principle amountsProvided guarantees on senior unsecured debt with fixed principle amounts

10 US Experience (cont…) 3.Extensive Public Awareness Strategy  Press releases to media/public  Public and congressional testimony  Active consumer education  FDIC Chairman Sheila Bair in the news

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12 Impact of FDIC Actions  Helped restore stability and liquidity in the banking system  Provided additional deposit security in the face of rising bank failures  Stabilized large transaction accounts as a critical source of bank funding- thus avoiding many potential failures  Facilitated the insurance and refinancing of bank debt and helped moderate funding rates In other words, helped restore and maintain public confidence

13 III. DIS Responses to the crisis  Temporary Increases in coverage US, Switzerland, Australia, New Zealand…US, Switzerland, Australia, New Zealand…  Permanent Increases in coverage Belgium, Czech Republic, Indonesia, Poland, UK…Belgium, Czech Republic, Indonesia, Poland, UK…  Full Depositor Guarantee Austria, Germany, Hong Kong, Malaysia, Thailand…Austria, Germany, Hong Kong, Malaysia, Thailand…

14 DIS Responses to the crisis (cont…)  Initiation of Fundamental Depositor Protection Reforms European Commission- New directiveEuropean Commission- New directive Many others focusing on:Many others focusing on: Primarily business checking accountsPrimarily business checking accounts Full coverage (guarantee) of non interest-bearing deposit transaction accountsFull coverage (guarantee) of non interest-bearing deposit transaction accounts Adequacy of coverage levelsAdequacy of coverage levels Payout capabilitiesPayout capabilities Resolution authorityResolution authority Risk-based differential premiumsRisk-based differential premiums Ex-ante fundingEx-ante funding Enhanced coordination and information sharingEnhanced coordination and information sharing

15 IV. Lessons Learned Adequate DI coverage + Timely (“prompt”) Payout Processes + Adequate funding mechanism + Public Awareness and communications = Financial stability

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