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This year the timing of this event is particularly opportune as it takes place soon after episodes of financial distress that have required the intervention of deposit guarantee funds. Moreover, only a couple of weeks ago the European Commission released an important legislative proposal on crisis management and deposit insurance (CMDI).
My remarks today are largely motivated by those two developments. More concretely, I plan to focus on the implications of uninsured deposits for financial stability.
Without expanding much on what we all know well, the recent turmoil has affected banks with different risk profiles on both sides of the Atlantic. On the American side of the ocean, a few mid-sized banks – with significant interest rate risk exposure – have failed. On this side, a major bank – actually a globally systemically important bank (G-SIB) – with a weak business model also failed.
While those banks were quite different, their failure followed a broadly common pattern. Although all failing banks satisfied minimum solvency requirements, market concerns about their viability provoked sharp corrections in equity prices which triggered unprecedented runs on deposits, particularly those not covered by the deposit guarantee scheme.
Those bank failures shined a spotlight on the significant increase in non-covered deposits and the structural risks posed by banks' reliance on them. A larger demand for banks' deposits can well result from a specific juncture characterised by ample liquidity and low opportunity costs in a context of low market rates. However, the speed at which the runs took place – fuelled by social media and the new technological means to move funds rapidly from banks' accounts – could call into question prevailing assumptions about the stickiness of non-covered deposits.
The prospect of a structural loss of stability in banks' deposit base could have severe implications for the sustainability of commercial banks' business models and the robustness of the current regulatory framework, including features of current deposit guarantee schemes. That has triggered a debate on what policy actions, if any, should be explored to preserve banking system stability in the light of recent developments. Let me share with you some preliminary ideas in that regard.
Arguably, both prudential regulation and deposit insurance share the same origin. In the first half of the 19th century there was a wave of bank failures affecting in particular the redeemability of bank notes issued by entities chartered in some US states, starting in New York in 1829. These triggered the creation of the first insurance programmes.
Those programmes included not only the insurance of a series of banks' obligations but also the introduction of some regulatory restrictions, such as a specific list of eligible investments for bank capital and the creation of an authority with examination powers. Prudential regulation and oversight were introduced mainly to mitigate the risk exposure of the insurance programmes. Yet authorities also recognised at that time the supplementary objective of providing assurance about banks' safety to their clients2.
The establishment of a prudential regime for banks has accompanied all deposit insurance programmes implemented since then in the United States, including the one leading to the creation of the Federal Deposit Insurance Corporation (FDIC) in 1933. Indeed, the first federal deposit insurance scheme had a limited coverage ($2,500). However, it also contained a detailed set of rules – including the compulsory separation of investment and commercial banking – established rigorous admission requirements and gave the FDIC substantial supervisory powers...
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