This paper considers the techniques which are – or should be – available for the resolution of banks which are primarily funded through retail deposits.
Some (often the majority) of these deposits will be protected through a Deposit Guarantee Scheme (DGS), and the DGS will therefore be an integral part of such resolution. Conventional bail-in techniques assume substantial wholesale funding capable of being bailed in. However many banks today do not have these levels of funding, and if the fashion for “ring-fencing” retail deposit taking persists, the number of predominantly or exclusively deposit funded banks will increase. It is therefore necessary to consider how such institutions could be resolved, what resolution tools would be needed, and whether there are further changes required to the architecture of the financial system to ensure that institutions of this kind should exist, and, if so, whether such institutions can be efficiently and effectively resolved.
The authors conclude that the resolution of a bank primarily funded by insured deposits can be achieved, but that in order to do this it is necessary to involve the DGS of the country or countries concerned at a much earlier stage than the stage for which these schemes were designed (that is, paying compensation after the event). As a result these schemes may well require changes to their constitution, objectives, legal powers and resources.
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© Clifford Chance
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