Volume II - PDF - International Association of Deposit Insurers

•BACKGROUND DOCUMENTS•
Part II: Outreach
in the issue paper on moral hazard, raised banks’
cost of capital, especially where there were multiple
regulators, as in the United States. Moreover,
supervisors needed information, skills, and
salaries commensurate with that paid by the banks
they supervised. He would have preferred to see
greater reliance placed in the paper on risk-adjusted
premiums. Where banks faced flat-rate premiums
they dangerously choose risky assets that
earned enough to cover the premiums. He considered
that having supervisors require banks to hold
subordinated debt instruments, another possibility
raised in the paper, was an unwarranted intrusion
on banks’ ability to determine their own
capital structure. Mr. Tannenbaum spoke in opposition
to capping the amount of money that could
be held in a deposit insurance fund, especially
where zero premiums were charged once the fund
had hit its target.
Professor Kroszner spoke as the next discussant.
He noted that the papers contained good ideas,
but that they were very general and would not provide
sufficient guidance to countries wishing to
institute or revise a system of deposit protection.
Recommending that staff revising the papers
should make them more specific and concrete, he
developed four topics that he thought could
enhance the papers. The first topic examined the
interrelationship between a deposit insurance
system and financial stability. The second topic
concerned the avoidance, in the first place, of
bank failures that required the deposit insurer to
intervene. The third emphasized the importance
of liquidity while the fourth examined constraints
on deposit insurance design and implementation
that derived from political economy.
Professor Kroszner observed that more private
market discipline was the answer to the first two
questions. Private insurers, for example, typically
work toward reducing risk ex ante. For example,
customers who installed sprinklers paid a reduced
rate for fire insurance. He said that the two issue
papers in Panel I discussed supervision and regulation
extensively, but needed to pay more attention
to discipline from the private markets. In this
context, his research on corporate governance and
liability structures was relevant, showing how
market discipline could be encouraged. Boards of
Directors of banks in the United States had more
outside members than the Boards of other firms,
which encouraged input from the markets. He
called for an incentive structure that would make
Board members more responsible for their bank’s
performance. The Boards of large banks in Japan,
and particularly in Germany, had more members
than those in the United States and they had
fewer inside directors, which also fostered greater
market discipline.
He noted that, with regard to closing failed banks,
the banking system needed to continue to provide
liquidity and transmit payments despite closures.
History in the United States had demonstrated
that closure policies must not impair market
liquidity. The financial crisis in the United States
in 1907, for example, was less serious than that in
1933 because the bank holiday in 1907 was only
partial—bank customers could continue to conduct
some transactions and checks cleared. In
1933, however, in some states the entire banking
system, including both good and bad banks, was
completely shut down. For depositors and the state
of the economy, however, prompt recovery of
depositors’ funds was always a key issue.
Professor Kroszner also recommended that any
revision of the papers pay more attention to issues
of political economy. Political pressures from
favored groups could impair the design of a deposit
insurance system and thwart the implementation
of even a well-designed system. Above all, the
papers needed to be more concrete and specific.
Mr. Robert Bliss delivered Professor Gordon
Robert’s presentation because the latter was trapped
in Toronto by the blizzard. He began with a medical
analogy—deposit insurance, like medical treatment,
could have unintended consequences. But at least
the deposit insurer (the doctor in the analogy)
should do no harm. He likened explicit deposit
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Guidance for Developing Effective Deposit Insurance Systems: Volume II