Fernando Restoy, the Chair of the Financial Stability Institute (FSI) of BIS, spoke at the FSI-IADI conference on crisis management, resolution, and deposit insurance. He highlighted that FSB reviews show an uneven and incomplete implementation of the FSB-issued Key Attributes of Effective Resolution Regimes. In most FSB jurisdictions, resolution planning to date has largely concentrated on global and domestic systemic banks. However, the design of effective regimes for managing smaller bank failures is also important and gaining increasing attention. Such strengthening of the crisis management frameworks might also benefit the emerging market economies where the nature of the local financial system does not support the smooth application of international standards designed for large, complex institutions.
Mr. Restoy point out that it is unclear that bail-in is an appropriate tool for smaller banks with little experience of tapping capital markets in the way that would be necessary to issue sufficient amounts of bail-in-able liabilities. Such retail-focused banks are mainly funded by capital and deposits and may not easily satisfy, within their current business models, the loss-absorbing capacity requirements that would be required for resolution. Additionally, in many jurisdictions, smaller banks that do not meet thresholds for the use of special resolution powers are subject to an ordinary corporate insolvency regime. This may not provide suitable tools for dealing with the public interest considerations that may arise in the insolvency of any bank, irrespective of whether it is systemic.
He explained that deposit insurance is a fundamental element of an effective bank crisis management framework. In its most basic form, depositor protection contributes to financial stability by reducing the risk of depositor runs. However, where the mandate allows the funds to be used for purposes other than payout, this can support alternatives to liquidation for banks that do not meet the threshold conditions for the use of resolution powers. He highlighted the role of deposit insurance in bank failure management, as discussed in a recently published FSI Insights paper. The paper shows a wide range of approaches to the use of deposit insurance funds to support measures within resolution or insolvency that maintain access to insured deposits, or to prevent the failure of a member bank. The ability of deposit insurers to fund alternative measures can increase options for managing bank failures. This may be especially relevant for medium-size or non-systemic banks, in which deposits may be the main form of loss absorbency.
The FSI Chair added that these considerations are gaining prominence in the policy arena. In EU, a promising debate is gaining momentum on the eventual creation of an FDIC-like authority backed by a harmonized insolvency regime for banks that do not meet the thresholds for resolution. He concluded that improvements to bank insolvency regimes along the lines suggested may help strengthen crisis management frameworks in emerging market economies, where the nature of the local financial system does not support the smooth application of international standards designed for large, complex institutions.
Keywords: International, Banking, Deposit Insurance, G-SIBs, Small Banks, Resolution Planning, Crisis Management Framework, BIS, FSI
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