The Basel Committee on Banking Supervision (Basel Committee) has published a speech given by its chairman Stefan Ingves. The speech is entitled Designing an optimal deposit insurance system.

In his speech, Mr Ingves discusses three challenges currently faced by deposit insurance systems:

  • the interaction between the resolution framework and deposit insurance. Mr Ingves notes that in principle the existence of bail-in tools means that there is an extra “cushion” of protection for insured depositors. Consequently, the likelihood of actual pay-outs from deposit insurance should fall. This in turn raises three further issues: (i) whether the development of resolution regimes has consequences for the fee structure of deposit insurance schemes; (ii) the actual role of the deposit insurance system in the resolution process; and (iii) how the introduction of resolution regimes affects market discipline and moral hazard;
  • the relationship between deposit insurance systems and public guarantees. Mr Ingves discusses whether private deposit insurance systems are as viable as public systems; and
  • cross-border issues. Mr Ingves notes that cross border banking places considerable demands on cooperation between the authorities of different countries. However, even in normal times, it is not always easy to reach agreement and it does not get any easier in a financial crisis. Mr Ingves mentions that conflicts of national interest can be particularly destructive. There are situations where taxpayers in one country could risk ending up bailing out depositors of another country. This could lead to uncoordinated actions, possible value destruction and heated diplomatic disputes. Mr Ingves believes that cross-border integration is likely to favour economic growth and welfare. But when considering changes to banks’ organisational structures, it is also important for authorities to discuss the implications that this will have for the financial safety net and to make the right preparations. In Mr Ingves’ opinion, changes in the operations of cross-border banking groups, such as “branching”, should be met with stricter requirements on the bank to maintain liquidity buffers in all relevant currencies. It should also trigger a discussion about the relevant size and composition of central bank foreign exchange reserves and about the deposit guarantee fund, as well as a discussion about possible swap agreements among central banks. In this regard, cooperation among deposit insurers is also critical.

View Basel Committee speech – Designing an optimal deposit insurance system, 2 June 2017

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