The case for private administration of deposit guarantee schemes

We make the case that the responsibility for appointing board members in Deposit Guarantee Schemes (DGS) for commercial banks should be entrusted to the industry. In doing so, we challenge the position adopted by the International Monetary Fund, which has proposed public DGSs as the best practice. We lay out the comparative advantages of private over public DGS administration, and contend that the role of the government should in principle be limited to regulating DGSs specifically and financial markets in general. We conclude that the current worldwide trend towards greater involvement of government in financial regulation should not be extended to the administration of DGSs.

European Deposit Insurance Scheme(s) – Consequences for the EU’s Financial Stability

The aim of this paper is to evaluate the potential consequences that the shortcomings in harmonising the national deposit guarantee schemes may have on the financial stability of the European Union. The relevance of this subject is underlined both by the European Commission’s intention to revive the European Deposit Insurance Scheme project in 2021 and the recent signals from Germany that they are willing to support the initiative. The paper presents a review of the discussions on establishing a European Deposit Insurance Scheme, the reasons for the project’s failure and the consensus solution that took the form of the Deposit Guarantee Scheme Directive (DGSD). The limited scope of deposit guarantee scheme harmonisation under this directive is discussed in the context of the related EBA opinions pointing to different areas of potential improvements. Differences in national implementation are also reviewed in terms of their potential impact on financial stability. Apart from a careful literature review, statistical analysis of the available financial information characterizing the largest national deposit schemes of the euro is performed to quantify their progress towards the target level of the available financial means. The results prove that most national schemes are still far from reaching the 0.8% target level of readily available funds and that potentially desirable amendments to the DGSD may drag them even further away from reaching that target by 2024. The author concludes that from the perspective of financial stability, the EU should focus on establishing a single scheme at an international level that would complete the project of establishing a banking union. The results contribute to the ongoing discussion on the need to further integrate the national deposit guarantee schemes inside the EU.

Alternative forms of deposit insurance and the quest for European harmonized deposit guarantee scheme-centred special administrative regimes to handle troubled banks

Since normal corporate insolvency proceedings run by law courts and purely aimed at liquidating troubled entities are generally considered inappropriate for peculiar institutions like banks, having a special administrative regime, which provides the authorities with resolution-like tools, is of paramount importance to maintaining the stability of the system and reducing the destruction of value. Still, in order for these special administrative regimes to properly work and, thereby, for the winding up to be orderly, as provided by the Bank Recovery and Resolution Directive, an active and leading role should be played by deposit guarantee schemes. Accordingly, this article advocates the adoption of special administrative regimes dedicated to troubled banks, harmonized at the European Union level and based on the interventionist role of deposit guarantee schemes, which I define as harmonized deposit guarantee scheme-centred special administrative regimes. But, from this perspective, a review of the European Union legislation, with regard to State aid provision and depositor preference, is needed to enable such schemes to properly perform their function through the so-called optional measures. And, in this regard, the article advances some reform proposals.

Italy

The Italian financial safety net and crisis-management framework has been substantially strengthened since the 2013 FSAP. Among others, the authorities have enhanced the early intervention framework, introduced a new resolution regime (including recovery and resolution planning requirements), and introduced reforms of the two deposit guarantee schemes (DGS) that are active in Italy. Further enhancements at the Banking Union level, as outlined in the 2018 Financial System Stability Assessment for the euro area (IMF Country Report No. 18/226)—including the introduction of an adequately funded common deposit guarantee scheme, a harmonized bank liquidation framework and a finetuning of state aid rules—would yield further benefits for Italy.

Banking Resolution: The EU Framework Governing the Resolution of Credit Institutions

On 15 May 2014, the European Parliament and the Council adopted Directive 2014/59/EU establishing a framework for the recovery and resolution of credit institutions and investment firms (Bank Recovery and Resolution Directive or BRRD). It was the first time that harmonized rules were adopted at European Union (EU) level in this field, as opposed to other fields in which a regulatory framework had been in place since the late-1980s and mid-1990s (respectively), such as the field of authorization, prudential regulation and supervision of credit institutions, currently governed by Regulation (EU) 575/2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) 648/2012 (Capital Requirements Regulation or CRR) and Directive 2013/36/EU (Capital Requirements Directive IV or CRD IV) and the field of deposit guarantee schemes (DGSs), currently governed by Directive 2014/49/EU (DGSD).

Austria

This note assesses and makes recommendations regarding bank resolution and crisis management arrangements. The scope of the assessment includes the institutional arrangements for recovery, resolution, and crisis management; the supervision of banks’ recovery plans; the legal regime for bank bankruptcy and resolution; resolution planning by the authorities and addressing impediments to resolution; assuring funding to support resolution; the two deposit guarantee schemes; and the government authorities’ collective preparedness to deal with financial crisis. The authorities relevant to this note are the Ministry of Finance (MOF), the Financial Market Authority (FMA), and the Austrian National Bank (OeNB). Main findings: Recovery and resolution planning are well advanced. Key impediments to resolution have been identified and are being addressed, yet adequate means to ensure sufficient funding in resolution remains to be determined. The legal framework is sound, although additional flexibility could be provided in the bankruptcy regime. The authorities’ collective contingency planning for financial crisis and testing of plans should be intensified. The following paragraphs elaborate on these and other matters.

Deposit flows and structure in Serbia

Having drawn attention to the existing banking regulation issues, the Global Financial Crisis also raised awareness of the importance of depositors' confidence for the stability of the financial system, and brought the role and significance of the deposit guarantee schemes to the fore. Serbian economy started experiencing its effects in Q4 2008, in parallel with the global spreading of the crisis. This paper focuses on the fluctuations in deposit levels and structure in the Serbian banking system, between 2008 and 2019. It also aims to underscore the importance and development perspectives of the Serbian deposit guarantee scheme.