25 October 2012

BoE/Tucker: The role of deposit insurance in building a safer financial system

Paul Tucker underlines the key role played by deposit insurance in international efforts to build solid foundations for global finance, though he says the UK “has not been alone in learning the hard way that it is not enough simply to have a deposit insurance system”. He states that the deposit insurance regime “has the potential to revolutionalise retail banking”, lowering barriers to entry. And in terms of who pays for this, “it isn't government and the taxpayer but the industry itself”.

Paul Tucker highlights that liquidation and payout to insured depositors can be a “seriously inferior” way of handling the failure of some deposit-takers. Some of the spillovers can be avoided, he says, if the insured deposit book and some good assets can be transferred to another bank (or other purchasers). He notes that in many major jurisdictions, including the UK, this is typically aided by an injection of resources by the Deposit Insurer, with the most critical services – transactions deposits and payments – thus maintained. But he points out that in both approaches to resolution, uninsured depositors and other creditors, including bondholders, take losses after equity is exhausted. By becoming a claimant creditor, the Deposit Insurer stands to lose money, with any losses later recouped by a levy on the surviving insured banks. So for banks funded by insured deposits, some of the costs of failure will fall on their peers. “Over time, I suspect that that will increase pressure for a funded deposit-guarantee scheme with risk-based levies.”

On resolution for systemically important firms, Paul Tucker says “the objective is, of course, to get to a position where public money is never used to provide solvency support for a failing bank, however large or complex”. He acknowledges the difficulty of drawing up resolution plans until the precise legislation is in place, and that different jurisdictions are at different stages in legislating to enforce the Key Attributes, the international standard on resolution regimes endorsed by the G20.

Paul Tucker says the most important of the three areas of the FSB consultation is that on the development of Resolution Strategies and Operational Resolution Plans, which seeks to provide guidance for the authorities on the key issues to address. But he cautions that what turns out to be the best approach in the event of distress will depend on the circumstances.

Paul Tucker says the FSB is putting in place a process where the most senior officials will talk to each other to reassure themselves of resolvability of globally significant firms, from which will follow detailed operational planning, and requirements to remove impediments to executing resolution strategies.

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