Volume II - PDF - International Association of Deposit Insurers

More documents

Recommendations

Info

•BACKGROUND DOCUMENTS• Part II: Outreach Panel I: Deposit Insurance Objectives and Infrastructure Requirements The panel was moderated by Mr. Douglas Evanoff, Vice President and Senior Financial Economist at the Federal Reserve Bank of Chicago. Mr. Evanoff introduced the paper-presenters: CDIC’s Mr. Gregory Cowper (standing in for Mr. Guy Saint- Pierre, who was prevented from attending the conference by a blizzard), and Dr. José Carlos Jaime, Chairman of Argentina’s Seguro de Depositos Sociedad Anonima. Mr. Evanoff also introduced the discussants: Professor Randall S. Kroszner of the University of Chicago, Mr. Robert Bliss of the Federal Reserve Bank of Chicago, who was standing in for another blizzard absentee—Professor Gordon S. Roberts of York University— and Mr. Carl Tannenbaum, the Director of Treasury Research at ABN AMRO Bank in North America. The presentation delivered by Mr. Cowper on behalf of Mr. Saint-Pierre, closely followed the WGDI’s issue paper on deposit insurance objectives. 3 Mr. Cowper stated that the paper is still very much work in progress. It sought to determine what were countries’ objectives, whether they were expressed explicitly, what processes were used to determine those objectives, how the chosen objectives had affected the design of countries’ systems, what tradeoffs existed among objectives, and whether some goals could be accomplished more readily than others. The subgroup, consisting of officials from Canada, Jamaica, the Philippines, and the IMF, had first conducted a review of relevant literature and had also studied materials submitted to it by Working Group members and others interested in deposit insurance issues. The Working Group had divided the many surveyed objectives for deposit insurance systems into three groups: (1) those that promoted financial stability, (2) those that protected the small depositor, and (3) a collection of additional objectives. Objectives that favor financial stability included creating formal mechanisms for resolving failed banks, contributing to an orderly payment system, and avoiding or resolving a financial crisis. The team allocated such objectives as enhancing competition, increasing banks’ contributions toward covering the cost of bank failures, replacing a blanket guarantee by limited coverage, facilitating the enactment of needed financial legislation, encouraging economic growth, and reducing the impact of a recession to the catch-all group of “other objectives.” So far, the team working on this issue paper had concluded that public policy objectives varied according to a country’s national goals and circumstances. The team had perceived that objectives influence the design of a deposit insurance scheme and that the goals chosen must harmonize with the structure of the deposit insurance system. He said that, in a changing environment, many countries periodically reviewed the objectives set for their system. The team recommended that policymakers identify the public-policy objectives for the scheme before designing it. The subgroup believed that public policy objectives must address a country’s needs and conditions and that the structure chosen must be consistent with its goals. In practice, Mr. Cowper said, policymakers in each country should present their objectives in a policy paper, and periodically review the objectives and structure of the deposit insurance system. Dr. José Carlos Jaime, spoke on, “Ensuring a Country’s Readiness for Deposit Insurance” provided interesting supplementary insights into the issues raised in the Working Group’s paper on “Situational Analysis”. Dr. Jaime started from the premise that a state had already decided to establish an explicit and limited system of deposit insurance. That system must then function as an integral part of the financial safety net, which the speaker characterized typically as a triangle consisting of three agencies—the supervisor, the deposit insurer and the lender of last resort. Dr. Jaime noted that deposit insurance could definitely not prevent the spread of systemic risk. However, it could prevent spillover from an isolated bank failure to the rest of the financial system. 164 Guidance for Developing Effective Deposit Insurance Systems: Volume II
•BACKGROUND DOCUMENTS• Part II: Outreach That action, he said, involved a cost that, under modern legislation, would be paid for by the members and users of the financial system. The supervisor could reduce that cost by taking prompt action to detect and remedy problems in the banking system. Permissive action by the lender of last resort could harm the deposit insurance fund, said Dr. Jaime. A troubled bank requesting lender-of-last-resort assistance would give its best assets as collateral for this assistance, which would go to benefit the weak bank’s most restless depositors—those who were not guaranteed and thus sought to withdraw their funds. Such action would increase the final cost to the insurer. Dr. Jaime set out how each of the three components of the financial safety net should behave. The lender of last resort should (1) limit spillover by lending funds that would be quickly recovered because they were paid only to illiquid but solvent banks, (2) provide assistance without expanding the monetary base, and (3) have an asset base that enabled it to sterilize assistance. He stated that, despite popular belief, even central banks in countries with a currency board were able to act as lenders of last resort if they had the appropriate assets on their balance sheets. The speaker observed that the supervisor required a legal/prudential framework that strengthened banks’ solvency and liquidity without hindering the work of markets. Thus, the Basel Committee’s Core Principles must be followed. In practice, the supervisor must be preventive and do more than just monitor ex post compliance with prudential regulations. The deposit insurer protected insured depositors when a bank failed so there should be no excuse for delayed supervisory action. No banker should benefit from, or be protected during, the winding up of his bank. Resolutions that in fact covered all liabilities at a “too-big-to-fail” bank violated this principle and led to ambiguity that was in no way constructive. Such resolutions also raised costs to the surviving banks. A sound government budget, absence of inflation, strong supervision, and politicians who did not meddle were all prerequisites for the establishment of a system of deposit insurance and for the better functioning of the financial system. Further, the safety net needed to function as a virtuous triangle with its three components acting in harmony. In its turn, the deposit insurer should resolve problem banks with a minimum commitment of funds and a maximum recovery of those expended. Moreover, the deposit insurer should not act as payer of last resort to the lender of last resort. Mr. Carl Tannenbaum of ABN AMRO (a large, Dutch, international bank holding company) spoke first for the discussants. In introducing him, Mr. Evanoff pointed out that Mr. Tannenbaum was the only practicing banker on the program—his bank paid deposit insurance premiums and footed the bill for others’ mistakes. Mr. Tannenbaum said that, while he was aware that there were alternatives to deposit insurance, he nevertheless was supportive of its aims to stabilize markets and assure the interests of small depositors. From a banker’s perspective, it reduced volatility, lowered the cost of capital, and built a stronger currency. He regretted, however, that private suppliers of deposit protection had insufficient funds and credibility to take over the government’s role. Mr. Tannenbaum doubted the ability of deposit insurance to achieve the objectives attributed to it in the paper on public policy objectives. Achieving financial stability, for example, would require 100 percent coverage, because the flight of large pools of uninsured money would be destabilizing. There was a danger that protection would extend beyond banks—for example, even commercial firms might be backstopped by the deposit insurance system under Holland’s universal banking system. One impediment to deposit insurance’s success was poor processing of information. Here he stressed the role that private rating agencies for banks played in providing information to the markets and the sophisticated public in the United States. Mr. Tannenbaum observed that reliance on supervision, regulation, capital requirements, and disclosure to thwart moral hazard, as recommended 165 Guidance for Developing Effective Deposit Insurance Systems: Volume II
Page 1 and 2:
Volume II FINANCIAL STABILITY FORUM
Page 3 and 4:
Acknowledgements The preparation Fi
Page 5 and 6:
•BACKGROUND DOCUMENTS• Part I:
Page 7 and 8:
Process •BACKGROUND DOCUMENTS•
Page 9 and 10:
Page 11 and 12:
Page 13 and 14:
Page 15 and 16:
Page 17 and 18:
Page 19 and 20:
Page 21 and 22:
Page 23 and 24:
Page 25 and 26:
Page 27 and 28:
Page 29 and 30:
Page 31 and 32:
Page 33 and 34:
Page 35 and 36:
Page 37 and 38:
Page 39 and 40:
Page 41 and 42:
Page 43 and 44:
Page 45 and 46:
Page 47 and 48:
Page 49 and 50:
Page 51 and 52:
Page 53 and 54:
Page 55 and 56:
Page 57 and 58:
Page 59 and 60:
Page 61 and 62:
Page 63 and 64:
Page 65 and 66:
Page 67 and 68:
Page 69 and 70:
Page 71 and 72:
Page 73 and 74:
Page 75 and 76:
Page 77 and 78:
Page 79 and 80:
Page 81 and 82:
Page 83 and 84:
Page 85 and 86:
Page 87 and 88:
Page 89 and 90:
Page 91 and 92:
Page 93 and 94:
Page 95 and 96:
Page 97 and 98:
Page 99 and 100:
Page 101 and 102:
Page 103 and 104:
Page 105 and 106:
Page 107 and 108:
Page 109 and 110:
Page 111 and 112:
Page 113 and 114:
Page 115 and 116: •BACKGROUND DOCUMENTS• Part I:
Page 135 and 136: II Outreach Process . . . . . . . .
Page 137 and 138: Activities •BACKGROUND DOCUMENTS
Page 139 and 140: •BACKGROUND DOCUMENTS• Part II:
Page 165: •BACKGROUND DOCUMENTS• Part II:
Page 217 and 218:
Page 219 and 220:
Page 221 and 222:
Page 223 and 224:
III Feedback
Page 225 and 226:
•BACKGROUND DOCUMENTS• Part III
Page 227:
FINANCIAL STABILITY FORUM Guidance
show all

Volume II - PDF - International Association of Deposit Insurers

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?