Back Matter
Author:
Mr. Atilla Arda
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Mr. Marc C Dobler
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https://orcid.org/0000-0002-9166-195X
Publication Date:
07 Jan 2022
eISBN:
9781616358389
ISBN:
9781616358389
Language:
English
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IV. References

Annex I. Selected Recommendations on Deposit Insurance and Crisis Management from FSAPs in EU Countries (2016–2021)

Austria (2020)

  • Explicitly provide for purchase and assumption transactions in the bankruptcy regime.

  • Consider the provision of ELA and continue to engage the SRB on policies and procedures for use of the SRF as a source of liquidity funding in resolution.

  • Seek legislation for standing authority to implement government stabilization measures.

  • Explore mechanisms under which a MOF guarantee could be prepositioned to support borrowing by either deposit insurance systems.

  • Assign a senior-level interagency body the mandate to ensure adequate contingency planning and testing of plans at the individual authority and national level.

Denmark (2020)

  • Strengthen the autonomy of the Financial Stability Company (FSC) (which is also responsible for the DIS), including by prohibiting “active” bankers to sit on its Board of Directors.

  • Expand the banks’ Single Customer View to ensure tracking of temporary high balances.

  • Measure public awareness levels of the DIS regularly to assess the effectiveness of public awareness activities.

  • Revive the Coordination Committee on Financial Stability and advance crisis preparedness with (i) a systemwide contingency plan; (ii) a crisis communication plan; and (iii) regular multi-agency financial crisis simulation exercises; in addition, expand the Committee’s membership with the FSC.

Italy (2020)

  • Avoid the use of DIF resources for failure prevention outside of resolution or liquidation as much as possible, only using it in exceptional circumstances with strong prospects for ensuring successful rehabilitation and long-term viability.

  • Review the adequacy of funding targets for deposit insurance, strengthen backstop arrangements, and shorten the statutory payout period for the Fondo di Garanzia dei Depositanti del Credito Cooperativo.

  • Remove active bankers from the boards of the deposit insurers and extend legal protection to their board members and staff, as well as directors and officers of entities in resolution.

  • Operationalize an inter-agency forum for crisis management and strengthen the deposit insurers’ role in the financial safety net coordination arrangements.

France (2019)

  • Remove active financial sector executives from the Board of the Fonds de Garantie des Dépôts et de Résolution [i.e., the DIS], which should only include independent members.

Malta (2019)

  • Ensure an explicit statutory basis for transferring selected assets/liabilities in insolvency.

  • Clarify in writing the deposit insurer’s interpretation of current laws and policies on its ability to finance the transfer of assets and liabilities in insolvency, and to finance the use of resolution measures.

  • Ensure a legal basis for replenishing the DIF, and additional funding sources, ideally from commercial banks but, as a last resort, a borrowing facility from the government; clarify that the Minister of Finance has the authority to lend to the DIF.

Poland (2019)

  • Amend legislation to ensure the independence of the deposit insurer.

  • Conduct purchase and assumption transactions in lieu of deposit payouts.

Belgium (2018)

  • Segregate the DIF from government funds to ensure ready access to deposit insurance and resolution funds.

  • Publicly commit to shortening the deposit pay-out period to seven days by 2019 to increase depositor confidence; establish credit lines with the MoF for the DIS.

  • Mandate a committee of the NBB Resolution Board [which includes the DIS/DIF] with proactively overseeing national financial crisis preparedness, including organizing regular intra- and inter-agency contingency planning and financial CSEs.

Romania (2018)

  • Prepare and conduct a simulation exercise that includes all members of the National Committee for Macroprudential Oversight and the DIS.

  • Formalize contingent documentation between the DIS and the MoF to allow financing support, allow the DIS to have accounts at the central bank, and eliminate the constraint to cover the DIS’ operational expenses only from the yield of the Fund.

Bulgaria (2017)

  • Continue implementing the timeline agreed with the World Bank Group for the disbursement-linked outcome indicators to strengthen the DIS.

  • Under the oversight of the Financial Stability Advisory Council with an expanded mandate (including contingency planning) and membership (including the DIS]), strengthen the crisis management framework.

Luxembourg (2017)

  • Allow the transfer of assets and liabilities during liquidation.

  • Arrange for backstop funding for the DIF.

Netherlands (2017)

  • Implement an SRM-wide deposit insurance scheme.

  • Commit publicly to a seven-day payout period for insured deposits by 2019.

  • Allow the DIS to finance deposit transfers both in resolution and in insolvency.

  • Ensure that the DIS has timely access to back-up funding.

Spain (2017)

  • Establish a cross-institutional entity for risk evaluation and crisis management.

  • Include the DIS in any cross-institution entity for crisis management and ensure that the DIS has a voice in any use of its funds for resolution.

  • Enhance the ability of the DIS to payout deposits in a timely manner, and establish an emergency/back-up liquidity system for the DIS.

  • Consider making the DIS a fully owned government institution and remove private bankers from its Board.

Finland (2016)

  • Commit publicly to a seven-day payout period for insured deposits by 2018.

  • Strengthen the legal and operational framework for legal protection of officials, staff, and agents of all financial oversight agencies, including the Finnish Financial Stability Authority (FFSA) that manages the DIF.

  • Under the oversight of the FFSA Advisory Council, ensure agency-specific and national financial crisis planning, including a national crisis management communication plan and regular single- and multi-agency crisis simulation exercises.

  • EU: Develop a more effective use of deposit insurance to fund resolution tools and implement an SRM-wide deposit insurance scheme.

Germany (2016)

  • Develop contingency plans for a systemic wide crisis and test plans via a simulation exercise.

  • Define a coordination mechanism including the SRB, ECB and MOF in a systemwide crisis.

  • EU: Establish a credible common permanent backstop for the Single Resolution Fund.

Ireland (2016)

  • Commit publicly to a seven-day deposit payout period, ideally by 2018.

  • EU: Allow a more flexible use of the DIS to fund resolution tools.

  • EU: Implement an SRM-wide deposit insurance scheme.

United Kingdom (2016)

  • Introduce risk-based contributions and update the lending protocol between Treasury and the DIS to reflect the new target level.

  • Re-examine the appropriateness of introducing an ex ante deposit insurance fund with a target level adequate for the U.K. banking system.

  • Include the Financial Conduct Authority and the Financial Services Compensation Scheme in the Crisis Management MoU, as well as in the periodic high-level discussions between the Bank of England and HM Treasury on contingency planning

Annex II. Selected Recommendations on Deposit Insurance and Crisis Management from the Euro Area FSAP (2018)

  • Establish EDIS, with a backstop arrangement.

  • Introduce a financial stability exemption from (i) the 8 percent mandatory bail-in for accessing the SRF and public funds; (ii) the 5 percent cap on SRF funding; and (iii) the proposed stricter state aid burden-sharing rules.

  • Subject to a financial stability exemption, align the state aid burden sharing requirements in liquidation with the BRRD/SRMR.

  • Ensure effective DIS financing of deposit transfers in both resolution and liquidation.

  • Operationalize in all EA countries lending facilities between DIS.

  • Pare back state aid oversight of SRB resolution decisions and the use of the SRF and DIS funding on a least-cost basis.

  • Adopt a system-wide crisis preparedness and management framework.

Annex III. DGSD: Use of Selected National Options in the Euro Area

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Source: IMF 2018. 1 Purple: yes, made use of the option; Orange: no, did not make use of the option.

Except subparagraph 4 of Article 13(1).
*

Atilla Arda and Marc Dobler (both, Financial Crisis Preparedness and Management Division, IMF). The paper builds on IMF work in various FSAPs in EU member countries and the Euro Area. The authors would like to thank Mark Adams, Thierry Bayle, Jose Garrido, Andy Jobst, Jan Nolte, Jaime Ponce, Andre Santos, and Zhongxia Zhang (all IMF) for their comments. Omissions and mistakes are the authors’ responsibility.

1

International Association of Deposit Insurers (IADI), Core Principles for Effective Deposit Insurance Systems, November 2014, Core Principle (CP) 1. Consistent with the Core Principles, this paper prefers “deposit insurance systems” to the European Union (EU) nomenclature “deposit guarantee schemes.”

2

While a DIS plays an important role in maintaining financial stability, it should be noted that a DIS typically is not sufficiently ex ante funded to pay out the depositors of a failed systemic bank or deal with a systemic crisis.

3

The KAs include powers to effect a closure and orderly wind-down (liquidation) of a failing firm, which the BRRD considers to be outside of resolution.

4

The banking union regime applies to the euro area countries and to Bulgaria and Croatia.

6

The FSB Key Attributes of Effective Resolution Regimes for Financial Institutions (KAs) list liquidation among powers that should be vested in resolution authorities (KA 3.2(xii)). The IMF proposed this tool in its first assessment of the euro area financial sector (IMF, 2018); it has been gaining traction among EU financial regulators (Koenig, 2020; De Guindos, 2021; Enria, 2021) and caught the interest of academia (e.g., Bodellini, 2020), policy institutes (e.g., Gelpern/Véron, 2019), and political decision-makers (e.g., “Banking Union Workshop on an EU Liquidation Regime,“ December 2019, organized by the European Parliament, Committee on Economic and Monetary Affairs.

7

Other preconditions for effective deposit insurance, prudential supervision, and resolution regimes are a sound system for financial stability risk monitoring and policy formulation, a well-developed legal framework, a well-functioning judiciary, and robust accounting, auditing, and disclosure regimes.

8

Article (38)(1)(b) of the BRRD provides the powers to transfer to a purchaser “…any assets, rights or liabilities of an institution under resolution.”

9

Where the DIA is not the resolution authority, it would be preferable that the latter develops and executes the P&A transactions. In such a case, and as explained in the IADI Handbook, p. 52, the deposit insurer “must be informed about proposals to use its funds for resolution and should be able to voice its view in deliberations.”

10

For use of P&A transactions and direct payouts since 1934, see the “Bank Failures and Assistance Data” section on the FDIC website (https://banks.data.fdic.gov/explore/failures). EBA (2020a) highlighted the economic benefits “of introducing into the DGSD a tool for using the failed institution’s assets for a DGS payout,” which is economically equivalent to a P&A.

11

For counterarguments, see Salama/Braga.

12

Removing active bankers and their advisors from DIA boards would mitigate some of the concerns and allow a DIS to become a more integral part of the financial safety net.

13

Passporting allows banks to offer banking services throughout the EU, either from their home country where they are licensed or via branches established in another EU member state, without the authorization of the host-country authorities.

14

See IMF (2018) for an overview of how EA member states have used their national discretions under the BRRD.

16

The 0.8 percent in the European Union compares to a 1.35 percent statutory target and a 2 percent long-term target in the United States, for example.

18

The peer review considered the results of 135 stress tests performed by 32 DIS from 27 EU member countries, covering, among other things, the DIS’ operational and funding capabilities.

19

Article 109 of the DGSD provides that “In all cases, the liability of the deposit guarantee scheme shall not be greater than the amount of losses that it would have had to bear had the institution been wound up under normal insolvency proceedings.”

20

A simple example may be illustrative. If a failed bank were liquidated and insured deposits of $60 were paid out, the cost net of asset recoveries for the DIS is estimated at €5. A resolution could instead be effected by transferring deposits of €60, backed by assets from the failed bank. But if the transferee would only accept €45 of “good” assets from the failed bank, the current interpretation would prevent the DIS injecting the difference (€15 million), even if the estimated resolution costs for the DGS, net of its recoveries (from its subrogated claim over the remaining assets in liquidation) were €0.

21

Another constraint is the five percent cap on SRF financing of resolution measures.

22

In Italy, for example, the Fondo Interbancario di Tutela dei Depositi (FITD) founded a voluntary scheme in 2015, following the decision by the European Commission that the provision of financial support by the FITD to a bank under administration (Banca Tercas) constituted unlawful state aid (IMF, 2020b). In March 2019, the General Court of the European Court of Justice annulled the Commission’s decision; in March 2021, the Grand Chamber of the Court dismissed the Commission’s appeal.

23

“Completing Europe’s Economic and Monetary Union,” report by: Jean-Claude Juncker in close cooperation with Donald Tusk, Jeroen Dijsselbloem, Mario Draghi, and Martin Schulz, 2015, presidents of, respectively, the European Commission, European Council, Eurogroup, the European Central Bank, and the European Parliament.

24

Reportedly, a Commission analysis showed that the probability of a liquidity shortfall in a crisis similar to the GFC would be 87 percent without EDIS, and 46 percent with full-fledged EDIS (https://www.euractiv.com/section/banking-union/news/commissions-leaked-study-beefs-up-arguments-to-complete-banking-union/ ).

31

It should be noted that while the EBA Deposit Guarantee Schemes Data shows around €60 billion in available financial means in all national DIFs together, some are nominal amounts not held by the DIFs, rendering them dependent on the country’s fiscal space at the time of a banking failure.

32

Besides, as noted earlier and observed by several national FSAPs in the EU, not all member states have national crisis management arrangements, and if they do, the DIA is oftentimes not part of these arrangements.

33

This approach already exists in Denmark where the resolution authority has decided that small- and medium-sized banks generally would also pass the public interest test (IMF, 2020c).

34

To improve the credibility of both resolution and liquidation scenarios, a wider set of banks should be required to hold MREL over and above equity.

35

For a discussion of preventive and other alternative measures see EFDI (2019).

37

This would be similar to earlier treaty changes in the state aid rules to introduce new exemptions (Treaty of Maastricht, 1992), unless Article 107(3)(e) of the Treaty on the Functioning of the European Union could be used for this purpose, which provides that “such other categories of aid as may be specified by decision of the Council on a proposal from the Commission” may be deemed compatible with the internal market.

38

Paragraph 10, 2013 Banking Communication.

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Cover IMF Working Papers
The Role for Deposit Insurance Funds in Dealing with Failing Banks in the European Union
Author:
Mr. Atilla Arda
and
Mr. Marc C Dobler
Volume/Issue:
Volume 2022: Issue 002
Publisher:
International Monetary Fund
ISBN:
9781616358389
ISSN:
1018-5941
Pages:
27
DOI:
https://doi.org/10.5089/9781616358075.001